Starting a business requires careful planning, and one of the most important decisions you’ll make is choosing a business structure. Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability.
There are seven popular business structures to choose from, including:
Sole Proprietorship: This is the simplest and most common business structure. It’s easy to form and gives you complete control of your business. You’re automatically considered a sole proprietorship if you do business activities but don’t register as any other kind of business.
General Partnership: This structure involves two or more people who share ownership of a business. Each partner contributes to all aspects of the business, including money, property, labor, and skill. In return, each partner shares in the profits and losses of the business.
Limited Liability Company (LLC): This structure combines the liability protection of a corporation with the simplicity and tax flexibility of a partnership. LLCs are easy to set up and maintain, and they offer personal liability protection for the owners.
C Corporation: This is a separate legal entity from its owners, which means it can make a profit, be taxed, and be held legally liable. C corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. Corporations also require more extensive record-keeping, operational processes, and reporting.
S Corporation: This structure is similar to a C corporation, but it has certain tax advantages. S corporations are taxed like partnerships, which means the company income is passed through to the owners and taxed at their individual tax rates. S corporations are limited to 100 shareholders.
Professional Corporation: This structure is designed for licensed professionals, such as doctors, lawyers and accountants. It offers personal liability protection for the owners, but it has more restrictions than other structures.
Nonprofit Corporation: This structure is for organizations that are not intended to make a profit. Nonprofits are exempt from paying federal income taxes and may be eligible for other tax benefits. They are also required to follow certain rules and regulations.
When choosing a business structure it’s important to consider factors such as liability protection, tax implications, and the complexity of the structure. Each structure has its own advantages and disadvantages so it’s important to do your research and consult with a professional like Ledger Aid before making a decision.