Which Business Structure is Right for You?
AN INTRO TO BUSINESS TYPES
Although it is not glamorous, it is important to set up the legal structure of your business as one of the initial steps. The legal structure of your business creates a clear distinction between you as an individual and your business and offers you protection. The structure you choose will affect the way you interact with financial institutions, how you are taxed, what types of forms you should fill out for government use and your personal liability as a business owner. For simplicity, we are going to look at the types of business that a single person would create if they are planning to join a host agency.
☝🏼 It is always a good idea to reach out to a lawyer and an accountant any time you are making a decision that affects your taxes and liability.
SOLE PROPRIETORSHIP
A business owned by one person
Default business structure if another is not established
Quickest and least expensive way to start a business
Profits and losses are realized by you as an individual for tax purposes
You pay self-employment tax and personal taxes as applicable by jurisdiction
The business owner takes on unlimited personal liability
Should only be used if you are a very low risk business
LIMITED LIABILITY COMPANY
Business can be owned by more than one person
Profits and losses are realized by the owner(s) on their personal taxes
You pay self-employment tax and personal taxes as applicable by jurisdiction
Protects you from personal liability of bankruptcy and lawsuits, as long as the LLC is appropriately administrated
Has the tax benefits of a sole proprietorship (your business is not taxed as a business, usually resulting in lower tax burden)
Requires registration (including fees) that usually can be done by an individual or with a little help from a legal service
An excellent option for small business owners who would like to save on taxes (compared to a corporation) while protecting themselves from legal liability.
C CORPORATION
A legal entity, separate from its owner(s)
Corporation shoulders the liability for taxes and legal concerns
Requires extensive record keeping and reporting
Significant start up costs, including legal and professional fees
Can have higher tax rates and incur additional professional fees for tax filing
Provides the most legal protection against liability for owners
Is a good option for medium to large businesses who need to raise funds by selling stock or need protection from the liability for higher risk activities
MY TWO CENTS
My very favorite business structure is the LLC. An LLC is a simple business structure that is inexpensive to form, has relatively low reporting requirements and protects you and your family from potential liability from your business. In most states, you can even set up an LLC for yourself, so you don’t have to pay any legal or professional fees. Before you make your LLC, you will want to make sure that you research the registration and reporting requirements in your state so that you can be sure you are compliant!
✨ Pro Tip - Your LLC name doesn’t have to be the same as the name of your business, so don’t overthink it! Just string together some words and numbers and call it a day. The more obscure, the less likely it is that someone else already owns the name.