Opening a small business can be a challenging experience if you don’t understand the different types of business structures you have to choose from. Understanding which one is the best fit for your business is important, not only for how you operate your company but for tax purposes as well. Your business’s structure will also be important if you ever decide to apply for a commercial loan for working capital.
Sole Proprietorship
A sole proprietorship is a business property that belongs to one person. The owner normally manages the daily operations and perform most of the tasks associated with handling the business. While businesses with this structure may have a few employees, they do not make any business decisions concerning the operations of the business. A proprietor is in control of the profits as well as responsible for all the debts of the business. This is the type of structure most sole owners choose because it is the simplest to maintain.
Partnership
A partnership is a business owned by two or more individuals. There are several types of partnerships to choose from including a general partnership, limited partnership, and LLC partnership. Each of these partnerships offers both advantages and disadvantages. For a small business owner, a partnership allows them to share the responsibilities with one or more individuals. Each person is responsible for an equal share of the business unless otherwise agreed upon.
Corporation
A corporation is a business entity owned by multiple people but managed aside from its owners. As a business owner you have two options to establish your corporation: S Corp or Corp. While the owners may manage the business, it is set aside from them and is its own entity in the eyes of the law. Because of how it is set up, a corporation is taxed twice, but it protects the owners from any type of personal liability. Double taxation occurs because the company is taxed and then the income each shareholder receives is taxed as well. This requires very accurate and detailed record keeping. There are also very strict reporting requirements that must be considered as well.
Limited Liability Company
A company with an LLC, or limited liability company structure, offers benefits associated with multiple structures. An LLC can have one owner or several owners. With an LLC, any business liability stays with the business and does not transfer back to the owners. When it comes to taxation, an LLC can opt for pass-through taxation or be treated like a corporation and be taxed accordingly. An LLC has perks that make it appealing for individuals who want to participate in a business but do not have to bear any of the liability. Understanding the structure of your company will make it easier for you to get a loan for working capital if you ever need one. If you aren’t sure your business is structured correctly, do your research and get advice from a financial advisor who can help you get the answers you need to all of your questions. The right business structure is important if you want to keep your business and personal taxes separate or you want to make sure you are able to get financial help if it’s needed.
