Which Business Structure is Right for You?
Updated: Nov 11, 2021
So, you took the leap and decided to start your business. You've got your business ideas fleshed out, you've done the hard work of picking out a name and designing a logo, and now you're ready to launch your business. You may be wondering what's next?
Well, before you jump into your business it's important that you figure out how to structure it so that you're able to protect yourself and your business, pay taxes, and make sure that you and your fellow business partners are set up for success.
Each business structure has it's pros and cons, so it's important to know what freedom and limitations you have so you can pursue the business structure that's right for you. In this blog we'll be addressing four of the most common business structures and their pros and cons for business owners. Let's get started!
1. Sole Proprietorship
Sole Proprietorships are the simplest structure for your business. If you do business activities but haven't registered your business in any form you are, by default, a sole proprietorship. As the owner of a Sole Proprietorship you are responsible for paying any taxes associated with your business. This means you need to track any income or losses associated with your business on your personal tax forms.
One of the greatest advantages for a sole proprietorship is that they are easy and inexpensive to form. This can be a great structure for those who are launching a new venture or operating their business as a side hustle.
While Sole Proprietorships have a lot of flexibility for those who are just starting their business it's also important to note their drawbacks. The greatest con to a Sole Proprietorship is that you are personally liable for financial or legal contingencies that your business might face. If your business is sued for any reason, your personal assets such as your home, car, or savings can be seized to pay cover these expenses. This differs from other business structures where the business and individual are treated as separate entities.
2. Partnerships
Partnerships provide the simplest business structures for two or more people to own and operate a business together.
There are two different types of partnerships that a business can pursue: Limited Partnerships (LP) and Limited Liability Partnerships (LLP). Limited Partnerships consist of a business structure where there is one general partner and one or more limited partners operating the organization. In this structure the general partner is responsible for all business decisions while the limited partner acts as a silent partner. Owners of an LLPs are protected from the actions of their partners and will not be held personally liable for the lawsuits brought against the business.
Some pros of Partnerships is that they allow you to team up with partners who may have differing or complimentary skill sets to your own. These partners also give your business greater access to capital and provide a natural support system as you work to grow your business.
Like any business structures, Partnerships also have their cons as well. Depending on the structure of your Partnership, you may be liable for the decisions your partner makes (LPs). Since you work as a partnership, you are also responsible for sharing your profits with your partners and will need to make decisions as a team leaving you with less autonomy than other structures allow.
3. Limited Liability Company
Limited Liability Companies (LLCs) take advantage of both corporate and partner business structures. Unlike Sole Proprietorships and Partnerships, LLC member assets are protected from any of the business's liabilities.
Similar to a Sole Proprietorship, LLCs have a pass-through tax system meaning the owners of the business are taxed instead of the business itself being taxed. This generally means that you will be taxed at a lower rate than if you were structured as a corporation.
One pro to having an LLC is that you can have multiple members and owners within your business. While that allows for a team approach, it's important that you find members that are in it for the long haul. If a member leaves your LLC for any reason, you will likely be forced to dissolve your current LLC and start a new one.
4. Corporations
The last structure that we'll be discussing today is corporations. There are several types of corporations but the most common types of corporations are C-corps (double taxed) and S-corps (not double taxed).
Unlike the other business structures listed, Corporations offer the greatest level of flexibility for transferring ownership. Ownership can change hands through the buying or selling of stocks. Corporations also offer the greatest liability protection to their owner of any business structure listed.
One of the greatest advantages to starting a Corporation is the ability to raise capital for your business. If you have a business idea that will require a large amount of financial backing, a corporation may be a great option for you. While Corporations offer you the greatest access to capital, they also carry a greater tax burden for their owners including taxation at both the entity and individual level depending on how the Corporation is structured.
Regardless of your business structure, it's important that you have a Creative Agency that understands your unique needs and can help your business be a success. Our team is here to work with you. We provide free consultations to any business seeking advice on their marketing needs. Ready to get started? Reach out to us for your next steps.