Starting a new business is exciting, but it requires careful planning and preparation. You must do things like evaluate the marketplace, secure financing, design a logo, determine your customer segment and figure out where you will sell your goods or services. More than knowing your company is going to sell custom footwear, you also must determine the structure of your company. Here is what you may need to know about picking the appropriate business entity.
The sole proprietorship is the simplest type of business structure. With a sole proprietorship, you do not even need to file for a separate tax identification number because you will be including your income from the business on your personal tax return. However, that also means you are personally liable for all the debts of the business.
With a partnership, you and one or more parties agree to form a business together. The partners share in the profits and losses of the business, but it does not always have to be an equal split. Like a sole proprietorship, the partners are personally on the hook for any debts or other liabilities the business encounters.
Limited liability company
A limited liability company provides some of the benefits of both a partnership and a corporation. This type of entity is not doubly taxed like a corporation, but it still allows you to be shielded from being personally liable for the business. There is also no need for some of the formalities of a corporation like annual meetings.
A corporation is the most complex business entity. People that form a corporation are not liable for the company’s debts. Corporations are taxed on company profits, as well as shareholder dividends. Since the corporation structure is more complex, a corporation must adhere to more government oversight.
Corporation hold annual meetings and must notify shareholders of changes to the company. One person generally does not make business decisions, so with a corporation, you are giving up some of your ability to guide the business. Forming a corporation is also expensive.
Creating a S corporation also allows you to keep your personal and business finances separate, so you are not personally liable for business debts. You do not have to pay corporate taxes for an S corporation, so you get to avoid double taxation. However, the number of shareholders is limited, and a S corporation must also hold annual meetings.
If you are opening a small business that is unlikely to face lawsuits, you may want to consider a sole proprietorship. A small startup budget may also make a sole proprietorship the best option. However, if you are concerned with protecting your personal property from debts the business incurs, you may consider a different type of business entity. If you believe your business may eventually go public, it may make sense to incorporate your business. Making the right decision about your company’s structure can set up you and your business for future success.