So you’ve decided to start your own business. If you’ve done any research at all, you’ve probably realized that there’s a lot that goes into getting a business going. There are branding decisions to make, marketing to do, insurance to purchase, and more. Before all of that though, you need to decide how you’re going to structure your business.
Sole Proprietorship
A sole proprietorship is the easiest business to form. In this business structure, the owner and the business are one and the same – there is no legal separation. Being taxed as a sole proprietorship is relatively simple, and owners can benefit from the ease with which they can intermingle business and personal assets. The downside to a sole proprietorship is that it carries some hefty liabilities. Because the business and the owner are considered to be one and the same, the owner is personally responsible for any debts or losses accrued, and suing the business means suing the owner.
Partnership
A Partnership, better described as a General Partnership is akin to a sole proprietorship, in so much as it’s easy to set up (doesn’t require any formal documents and/or state filings) and the business owners can be up and running immediately. A General Partnership is a business made up of two or more partners who agree to work together in pursuit of profits. It’s the worst business entity for most for various reasons including, unlimited personal liability for the acts and omissions of other partners. A partner also has unlimited personal liability for acts of staff/employees. Because it’s taxed as all net income is “earned income,” the partners (generally) must pay self-employment tax on all the income that flows to the partners. Partners owe a duty of utmost fiduciary care. Unless your business is only bringing in a VERY small amount of income and has a very low risk profile, a general partnership may not be the right choice. In short, friends don’t let friends become members of general partnerships.
LLC
An LLC, or limited liability company, offers the liability protection missing from a sole proprietorship. It also separates the business from the business owner, each being considered a separate entity for legal purposes. LLCs are also only taxed once, unlike C corporations, which are taxed twice. They also tend to carry greater credibility than sole proprietorships. It does take a bit more to set up an LLC than a sole proprietorship, and regulations and fees vary based on the state in which it is located. LLCs also don’t allow for shareholders or selling stock, which might be a downside if that’s something you want to do with your business.
S Corporation
S corporations are the most common business structure, taking the LLC to the next level with greater liability protection, more shareholders and investors, and corporate regulations. S corporations don’t pay income taxes. Instead they pass on profits or losses on to shareholders who report the income on their own personal taxes. They also offer limited liability protection, investment opportunities, and are more likely to survive the death of an owner than sole proprietorships or LLCs. On the other hand, they are limited to 100 shareholders. The IRS tends to look at them more closely. And there is more involved in setting them up and registering them than there is with a sole proprietorship.
As you can see, it’s important to take into consideration which business structure is right for your vision when starting your own company. Each structure has its pros and cons that should be carefully researched and weighed. Once you’ve figured out which one works best for you, you’ll be in a better position to get your new business off the ground.
To make sure your business liabilities are covered, it’s important to have good insurance. Take a look at our business insurance offerings to find what options work best for your company!