If only it were so cut and dry when starting a business, we wouldn’t have all these headaches with paperwork, legal stuff and guidelines to deal with. However, the way business works would be a disaster if we didn’t have these specific legal structures to choose from, namely….
- Sole Proprietorship
- (C) Corporation
- (S) Corporation
- LLC (Limited Liability Company)
That’s a lot to take in, especially if you may not know how they’re all different. Each one has specific advantages depending on the needs of the business. Each one also has certain aspects you must take into account, or else you’re losing money on account of your negligence. Pay close attention, because this is undoubtedly everything you could ever possible know about the kind of business structure you would need to choose for your own corporation or entrepreneurship.
Starting With the “Sole Proprietorship”
This may be the easiest business structure to grasp, because, essentially, it’s all about you. That’s it. You’re a one-man operation, basically. You call the shots, you’re the CEO, the executive, the trainer, the employee, the accountant, the bookkeeper, the associate, the administrative assistant — you’re everything.
It may seem appealing, and you may be right in pursuing this business structure for your specific reasons, but do understand that while you call all the shots, you’re also held responsible for just about anything and everything with the business. If your business is sued, essentially you are held responsible. Your business, in effect, is you.
Moreover, taxes are even more of a responsibility for you. There is a self-employment tax you need to be aware of, and the Form 1040, Schedule C, is a necessity. Tax payments typically can be made four times a year to spread it all out, but only if you owe $1K or over in federal taxes after deducting all your witholdings and credits. At the very least, though, your business earnings are only taxed once. Yet raising money or getting a loan for your business can be a stretch as oftentimes financial institutions won’t be too keen on lending money to a sole proprietorship.
Take care, however, to look at all of it very studiously. It might be right for you.
The Business “Partnership”
Perhaps you’re not the 1-man operation. That’s fine. Maybe there’s two of you, or possibly more. In that case, you might have a business partnership, something actually quite similar to sole proprietorships except for the fact that there’s more than one ‘owner,’ per se.
What you need to know about this particular structure is that there are two types — general partnerships and limited partnerships. This operates very much like the sole proprietorship. General partnerships handle everything in the business; however, limited partnerships involve investors without any liability or control over the company.
One of the main advantages of the business partnership is the fact that taxes often can be quite beneficial, with taxes passing through all profits and/or losses between individuals. Essentially, if you make a ton of money between the two of you, taxes may be taken out of those profits, making it quite easy for you to deal with the IRS.
On the other hand, personal liability gets a little tricky here. Since there are now more than one person invested in the business, determining who’s liable for things like lawsuits, claims and debts may come down to filing an agreement, stating who is responsible for what.
The (C) Corporation
This is where we get to the real complexity of business structure. We’re talking about big companies now, as there are obvious benefits and a drawback or possibly two here. For one thing, a (C) corporation gets several protections in the event of lawsuits and claims. Instead of your personal assets facing danger, simply the revenue and profits of the company face danger. You are, essentially, completely separate from the actual company. Moreover, fundraising gets a great deal of help with the ability to sell stocks and bonds for additional revenue.
Bear in mind, though, that costs for maintaining this business structure are pretty high. Additionally, this business structure requires that you pay a double tax for all your earnings, one for the state and one for federal. Pay close attention to the entire revenue your corporation generates, basically.
On the Other Hand…. There’s the (S) Corporation
This is slightly similar, only with specific benefits toward small business owners with more appealing tax benefits while still providing liability protection. Here we have shareholders sharing some of the responsibility of passing income and losses through the system. It, therefore, means you would only have to pay one business tax — the federal tax.
On the downside, though, your paperwork gets heftier with this structure — you’ve got to worry about articles of incorporation, director and shareholder meetings, maintaining corporate minutes and even allowing shareholders a right to make decisions for the company. You’re not as much in control of the corporation with this subcategory as you are with the other. To make it worse, you only one type of stock you can issue out for the purpose of raising capital, not to mention only certain groups and entities have the right to own your stock.
But What About the Limited Liability Company (LLC)?
If Goldilocks were here, she just might say the words “just right,” as this is a hybrid form, around since the late ‘70s, combining some of the best features of partnerships and corporations together. You get all the liability protection corporations receive but without the headaches of double taxation and the pass-through of any taxes to the owners, including personal tax returns.
Additionally, there’s no limit to how many shareholders you may have in the LLC, plus those shareholders get a full say on how the business operates. In essence, an LLC gives more freedom and maneuverability.
LLCs, though, really don’t last too long. You might find some states actually say that such companies must dissolve after a period of 30 years. With the flexibility comes a more lax way of maintaining the legal protocol of handling the business. The paperwork, the filing — all of that stays the same. Forget about the shareholder meetings, stockholder meetings and other board meetings, as they’re not mandatory. It might disorganize you, though….
Which Business Type Is You
It’s a lot to look at. It all, though, depends on your needs, what your company will look like, how it will operate, and what role you really want to have in the operations of it.
Consult with your qualified business lawyer about which one might suit you best. Just remember: each has its own advantages and disadvantages. Which one’s right for you? You be the judge.