When you start a small business, choosing a business structure is a key step as it will define ownership, personal liability, legal protection, taxes, and everyday operations. Regulations vary by state, so before you register your business with the state, you must ensure you’ve ticked all the boxes such as getting a tax ID number (the equivalent of a personal SSN for your business) and filing for the necessary licenses required by your state.
Before choosing your business structure, it’s important to consider the types of structures, how they function, and how they will meet your business goals.
Types Of Business Structures
1. Sole Proprietorship
If you don’t register as any other business structure, you are automatically considered a sole proprietorship if you are doing business activities. You are in complete control of your business and your business assets and liabilities are not separate from your personal ones. You can also be held personally liable for the debts and obligations of your business if you experience bankruptcy. Additionally, sole proprietorship income and expenses are included as part of your personal tax return and you must file Form 1040, including Schedule C and Schedule SE for self-employment tax.
Sole proprietorships can be a great place to start for low-risk businesses as it is inexpensive and easy to set up. You may also be eligible for some tax deductions.
2. Partnership
This type of business structure involves two or more owners. A partnership is similar to a sole proprietorship in that it is not considered a separate legal entity from the owners. Therefore, the profits and losses of the business are the responsibility of each owner, and they must report them in their personal tax returns using Form 1065. Partners are also required to pay self-employment tax.
Partnerships are also very simple to set up. Before starting a partnership, it’s important to feel confident and have trust in the person you are going into business with, as disagreements can lead to the slow down of operations, and partners are personally responsible for any debts and obligations, including personal assets like vehicles and homes.
3. Corporation
There are two primary types of corporations: C-Corp and S-Corp. These are legal entities that are separate from their owners and the corporation itself can make a profit, be subjected to tax, and be held legally liable. S-Corps function like a regular corporation (C-Corp) with some different taxation criteria and a limit of 100 shareholders. While corporations protect owners from personal liability, they are also expensive and complex to set up and require more stringent regulations. Many companies hire attorneys to supervise the registration process.
One of the main benefits of becoming incorporated is the ability to sell shares to the public and raise significant capital.
4. Limited Liability Company (LLC)
An LLC is a hybrid version of the structures above, combining the characteristics of both a sole proprietorship or partnership and a corporation. LLCs provide personal liability protection as well as lower tax requirements and fewer regulations. To register an LLC, you must file articles of association with the Secretary of State in the state you intend to do business.
The profits and losses of the business are passed to the owners, which owners are then required to include a share of them in their personal tax returns. Owners of an LLC are also required to pay self-employment tax.
Need Help?
Choosing a business structure and meeting all the requirements can be daunting. That’s why we have expert Business Bankers at Republic Bank to get you on the right track. Take some stress off your shoulders and give us a call at 800-526-9127. Plus, visit our library of resources for more helpful financial tips!
