Choosing the Best Business Structure for Your Company

One of the many decisions a small business owner will be required to make is choosing the best business structure for your company. You may view it as a daunting task due to the surplus of options, but this can be avoided if you understand what your options are and how they’ll affect your company. 

Everything from the way your business operates to the amount of taxes you pay each year can depend on how you structure your company. At the end of the day, you’ll want to take your employees and customers (as well as yourself!) into consideration when selecting a business structure.

In most cases, you’ll have five structures to choose from — sole proprietorship, LLC, partnership, C-corp, and S-corp. We’ll describe each one in more detail below!

Sole Proprietorship

If you’re looking to have full ownership and control of your company, a sole proprietorship could be what you’re looking for. As the sole proprietor, you won’t have any co-owners or partners holding a stake in your company. 

There will be great risk involved, as your business assets and liabilities will not be separated from your personal assets. When filing personal taxes, you’ll have to enter both your personal and business income/expenses as one. 

This also means any debt or losses the company experiences are the responsibility of the owner.

Partnership

Partnerships are businesses that are owned by two or more individuals. They will fall under one of two categories — general partnership or limited partnership. They will be taxed at the personal income level.

In a general partnership, the owners will operate the business together and absorb any losses as a group. There will typically be an agreement signed to divvy up the shares. 

Limited partnerships will allow for a limited partner to join in the equation. Limited partners aren’t responsible for any liabilities, but are more seen as an investor. You’ll still need at least one general partner to complete a limited partnership.

C-Corp

A corporation, also referred to as C-corp, will act as a separate legal entity and will provide the owner(s) with maximum protection in regards to liability. In return, they will be required to follow strict bookkeeping and reporting guidelines.

Corporations will be double-taxed, meaning both the business and shareholder’s personal income will be taxed. 

S-Corp

An S-corp is similar to a corporation; however, it will see profits and losses bypass the corporate tax rates. Instead, they’ll be passed through the owner’s personal income and won’t be double-taxed. 

In order to own an S-corp, you must be a United States citizen and have no more than 100 shareholders.

Limited Liability Company (LLC)

Lastly, we have an LLC. These are popular because they combine a lot of what you love about each structure we’ve talked about thus far. 

In an LLC, the owner(s) won’t see business and personal assets/liabilities intermingle. Instead, each owner shares responsibility when it comes to taxes and won’t be liable for any debts. 

Of course, managing your company’s financials will differ depending on which structure you choose. To learn more about how each business structure will affect your company, contact me today!
References

“Business Structures.” Internal Revenue Service, 23 Jan. 2020, www.irs.gov/businesses/small-businesses-self-employed/business-structures.