Deciding which business structure is suitable for you is the first big legal decision for every fairly new small business owner. Making this decision can be confusing because the type of legal structure that you choose for your enterprise can create an impact on the amount of taxes, the paperwork your venture requires, the personal liability you need to face as well as your ability to raise the kind of money as per the structure you choose. Each type of business structure is different with its own pros and cons.
Sole Proprietorship
This type of structure is best for startups where you do the owner wants to go into business all by himself. This is also simple form of structure where a small business owner has to just choose a name for his business and get to work.
Pros of this structure is that, SMB owner is exempted from double taxation that the corporations have to pay. Here you don’t pay corporate income tax but need to pay personal income tax. The drawback of this business is that since it’s a sole proprietorship model, the risk attached to this business is high.
For instance, if one of your employees cause damage to someone else’s property, the legal actions can be taken against the small business owner. This puts everything that he owns at risk. Again raising money for the business needs is not so easy. Banks and other lending institutions would be reluctant to offer loans and you would have to rely on your financing sources such as home equity, savings or family loans.
Partnership
In this structure of business, the business will be owned and operated by two or more individuals. Here, the partners not only manage the firm but also take the responsibility of eventualities such as debts and similar obligations. In partnership form of structure, the income earned is filed on the individual partner’s tax returns. In this structure also you do not have to pay corporate tax and double taxation can be avoided.
C-Corporation
This is a business structure where you and the shareholders pool the money to form a company. In this form of business structure, the business is seen a separate tax entity by the IRS (Internal Revenue Service). Therefore, the profits earned will be taxed twice. Once as the corporate income tax level and then again at the individual tax level, when the small business owner receives his salary, dividends or bonuses. Since the C corporation is a separate entity, the personal risk is limited.
S-Corporation
Like C Corporation, this structure is also a legal entity. Here the income earned from the business directly goes into the personal account. Here, the SMB owner is not taxed twice and the liability is also limited.
Limited Liability Corporation (LLC)
This business structure combines the benefits of both sole proprietorship as well as that of the corporation. A LLC is also a state allowed business structure and its owners are known as members. In this structure there can be any number of members however, there has to be a managing member who should be responsible for the daily operations of the business. The taxes also pass through to the personal income taxes. Another advantage is, compared to the C or S corporations, the paperwork for a Limited Liability Corporation(LLC) is less. Also it’s not necessary to hold a shareholders meeting annually.
As a small business owner you should select the business structure keeping in mind your liability. Choosing more liability for the ease of setting up the business can be dangerous. It’s important that small business owner seek the help and advice of the business experts. You seek expertise from SBA or the SCORE (Service Corps of Retired Executives) or from expense accountants and attorneys well-versed in business structures.
