Business Structures: Everything You Need to Know
Business structures are the legal designations given to companies that determine the tax method and management structure of the entity. 3 min read
What Are Business Structures?
Business structures are the legal designations given to companies that determine the tax method and management structure of the entity. There are several options and the legal business structure you select will dictate the ease of funding, your personal liability, the amount of paperwork required to create your business, and the costs to form.
One of the most important considerations to make when picking a business structure is the tax implications of that entity. Each business structure has its own unique tax method, so strategically picking a business structure that offers favorable taxes for you as an owner is important.
Switching between business structures is possible, but it will require additional paperwork to reorganize and you will need to notify your state tax department as well as the Internal Revenue Service (IRS).
Deciding on a Business Structure
Picking a business structure for your new company is an important step. If you're not confident on which entity designation is best for your needs, it's worthwhile to reach out a business advisor with experience in selecting business structures. There are pros and cons to each business structure, so it's a good idea to weigh out your options before making a decision.
If you're looking for advice on picking the bust designation for your company, you can access free resources online like the SBA's website or Service Corps of Retired Executives (SCORE). It may also be a good idea to find a CPA or legal counsel to help guide you through the business formation process.
There is no uniform answer to what business structure is best, rather they all meet different requirements. For instance, let's say you're looking to run your own company without any employees, a sole proprietorship might make the most sense because it's easy to form and requires little legal documentation. However, you may want to consider a Limited Liability Company (LLC) if you want to take advantage of the protection that the designation provides.
Each business structure is unique, just like every business. To determine the best business structure for your needs, take advantage of the many online resources and paid counsel that are available.
What Are the Different Types of Business Structures?
There are a variety of different business structures for you to choose from. The most common forms include:
- Sole proprietorship
- Limited Liability Company (LLC)
- Corporation (C-corporation and S-corporation)
- Limited Liability Partnership
Understanding Sole Proprietorships
The business structure known as a sole proprietorship is one of the easiest entities to set up and operate. If you are an individual that doesn't intend to grow your business beyond yourself, then this business structure may be a good option. One of the benefits to running a sole proprietorship is that you can recognize your business expenses and revenue on your personal income tax return. It's important to note that a sole proprietorship is not considered a separate legal entity.
Simply put, a partnership is a sole proprietorship with more two or more members. There are no legal documents or fees that need to pay to the government as a partnership. If you start a business with someone else, you have entered into a partnership. For tax purposes, the partnership split in revenue is recognized on that person's tax return. Each partner is personally liable for their share of the business' debt and other legal obligations.
Corporations are complex and expensive business structures. It's considered a separate legal entity which offers personal protection for owners from legal or financial liabilities. Filing a corporation does require a lot of paperwork and continued fees and documentation. One of the benefits to a corporation includes the ability to raise capital by selling stocks, or ownership of the corporation.
Understanding Limited Liability Companies (LLCs)
A Limited Liability Company (LLC) is the newest business structure in America. It was created as a hybrid entity designation that affords owners personal protection similar to a corporation and the tax benefits are given to partnerships and sole proprietorships. What makes the LLC unique is that it's a separate legal entity. Because it's independent of its owners, the members are not personally responsible for debt obligations of that business, even if it files bankruptcy. Owners also get to recognize company revenue and expenses on their personal income tax.
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