If you are running a business, whether you are a freelancer working for yourself, selling items in an online shop, establishing a startup, or leading a growing company, there are several different business structures to consider. These include a sole proprietorship, a general partnership, a limited liability company (LLC), and a corporation (Inc., short for Incorporated). Depending on the type of business structure you choose, there are different benefits and drawbacks, including tax classification, limiting liability, and asset protection. It is important to choose the option that is best for your business based on its size, needs, and goals.

  • Sole Proprietorship
    A sole proprietorship is an unincorporated business that is owned by the person running it. Since a sole proprietorship is usually the simplest, easiest, and most cost-effective business entity, it is how many small businesses start. However, it offers no legal protection for the owner, as there is no distinction between the owner’s personal assets and expenses and their business assets and expenses. This means that if the business is sued, the suing party can go after the owner’s personal assets. However, depending on the type of services provided, many sole proprietorships don’t generate enough business to make getting sued very likely.
  • General Partnership
    A general partnership is similar to a sole proprietorship except that in this case, the business has more than one owner. In this business structure, two or more people have agreed (ideally in a formal written partnership agreement) to share all of the business’s assets, profits, and liabilities (both financial and legal). Compared to a corporation (see below), general partnerships can offer owners’ more flexibility in regard to how they structure and operate their business, which can allow for quicker decision-making and more responsive management. However, if the business is sued, the suing party can still go after both owners’ personal assets.
  • Limited Liability Company (LLC)
    In order to establish an LLC, you must file formal documents with the state. Because an LLC is a business entity that is legally distinct and separate from its owners, it protects owners (known as members) from personal liability for business obligations. In addition, LLCs are not tied to one particular tax classification, so they can be taxed as sole proprietorships, partnerships, C corporations, or S corporations. However, one thing to keep in mind is that there are additional legal and accounting costs for forming and operating an LLC (same with a Corporation) that may exceed the revenues of your business. It is important to know what income threshold your business needs to reach in order to justify those additional costs.
  • Corporation (Inc.)
    In a corporation, the owners are known as shareholders, and each own a portion of the business. By default, corporations are taxed as C corporations, which means they file a corporate tax return and pay corporate taxes. Any shareholders who take distributions from the company must also pay personal income taxes on them. However, some corporations are eligible to be taxed as an S corp, where they do not pay corporate income tax. To be eligible, the corporation must have 100 or fewer shareholders and meet additional ownership requirements. In addition, corporations have a much stricter management structure, including having a board of directors to oversee the business, holding shareholder meetings at least annually, and maintaining appropriate paperwork and record-keeping, among other requirements.

Choosing the right business structure for your company is a complicated task. It is important that you weigh the advantages and disadvantages of each business type before making a decision. An experienced financial advisor can help you determine which structure is best for your business, whether you are just getting started or looking to expand your growth, optimize your tax strategy, or increase your liability protection. No matter your goals, I am here to help. Feel free to contact me to schedule a free consultation.