When you are setting up your business, you want to choose the right business structure for your needs. Your business structure impacts many areas of your business—from personal liability to taxes. Here we look at types of businesses and the pros and cons of each.
This type of business allows you to maintain complete control of your company as the sole owner. The challenge of sole ownership is that it leaves you solely responsible for any financial issues that arise, including debt. As a result, all business assets are yours, but so too are any liabilities. All debts are yours.
This type of business formation is best for those starting a low-risk business, or if you are simply putting out feelers to see if business ownership suits you. It’s also a good solution if you provide a service because you are less likely to rack up debt for things such as inventory, manufacturing materials, and/or equipment.
As the name implies, this business formation is for people going into business together. You have two choices:
- Limited partnerships: One partner has unlimited liability, and the rest have limited liability but limited control.
- Limited liability: All partners have limited liability from debts against the partnership, as well as protection from what other partners do.
This is a common choice for professional services such as attorneys but also works for companies with more than one owner. Like the sole proprietorship, if you have a partner and want to see how your business fares before setting up something more formal, this is a good solution.
Limited Liability Company (LLC)
The LLC protects your personal assets in the case of a lawsuit or if your business must file for bankruptcy. For taxes, business profits and losses can still go through your personal income without paying corporate taxes. On the downside, you have to pay tax contributions towards Medicare and Social Security as you are considered self-employed. This is the way to go if you are starting a larger business or where you fear you’ll face more risks. It also makes more sense for those with higher personal assets that need protection.
There are a few different types of corporations you can form. This type of business completely separates you from the company financially. It also means your profits are taxed and you can be legally liable if your business causes harm. The C corp costs more to run compared to partnerships and sole proprietorships. Adding to those costs is the need to keep formal records and create operating procedures. You can face hefty corporate taxes on your profits and even more if you have shareholders. Being able to go public and sell shares is a benefit as it allows you to raise capital. If you plan to expand and need funds to do so, a C corporation could work well. S corporations avoid the taxes applied to C corps as you can pass taxes through your personal income.
However, depending on the location of your company, some states do charge corporate taxes at a certain profit limit. B corporations are taxed like C corporations but hold a special responsibility to shareholders to show their business contributes to the public good. This would apply to a small group of companies. Last but not least, the close corporation is similar to B corporations but with a less formal setup. This makes them a good choice if you want a corporation, but don’t want to run it under a board of directors.
Now that you understand the types of businesses to form, you can choose the best one for your business formation. Register your business today.