One of the first decisions small business owners have to make is what type of business structure they’re going to use. This sounds like it’s just a technical decision, but it’s actually the foundation that determines how your business will function.
The structure of the business affects how you handle taxes, your personal liability, rules for ownership and how the company can raise money. You have to decide how you need to balance practical needs, flexibility and protection.
4 general business structures
Sole proprietorships are the simplest business structure, but these don’t offer any protection. You own the company alone, and there’s no division between your personal assets and the business. This is typically only suitable for low-risk businesses.
A limited liability company, often referred to as an LLC, is another simple business structure. This is a bit different from the sole proprietorship because it has a dividing line between your personal assets and the company. There’s a flexibility with taxes because you can claim the LLC’s income on your personal tax return; however, there’s also the option to have it taxed as a corporation.
Partnerships are another option, which allows for more than one person to own the company. These require partnership agreements that outline the duties and responsibilities of each partner.
Corporations are another business structure. These are highly regulated and complex. There are different types of corporations, each of which has different requirements and benefits.
Most small businesses will start out as an LLC or sole proprietorship if there’s one owner. An LLC or partnership is possible when there’s more than one owner. It’s critical that the decision is based on the business’ risk level, tax plan and future goals. Working with someone who can explain the benefits and risks of each option and assist with getting the business set up is beneficial.