When beginning the journey of entrepreneurship, most people are confident they know their business, yet many are less clear about the best way to structure their business to maximize profits, limit exposure to liability and minimize the time and effort consumed by recordkeeping. Exploring the following options and making the best decision on how to structure your business now will pay dividends down the road.
This is the simplest type of business structure and may be suitable for you if you intend to be a one-person business. Unlike other business entities, a sole proprietorship is taxed only once. Profits or losses are calculated on Schedule C, with the result transferred to your personal 1040 form for tax purposes. However, as a sole proprietor, you are fully responsible for your social security and Medicare taxes, which are reported on Schedule SE. Estimated taxes are required to be paid in quarterly installments.
One negative of a sole proprietorship is that you are personally responsible for any liabilities, which means your assets can be exposed. Another is the difficulty you may encounter trying to raise money from banks for business expansion.
If you and one or more other individuals want to go into business together, a partnership is an option. Partnerships are of two major types:
- General partnership – General partners manage the day-to-day business of the company are assume the liability for its actions.
- Limited partnership – A limited partnership has both general partners and limited partners who are investors only and assume no control over the business operation.
According to DelawareInc.com, limited partnerships are more complex regarding paperwork and accounting than general partnerships. A partnership is not taxed as an entity but must file a tax return. The partners pay taxes on their share of profits. Partnerships use IRS Form 1065. Personal liability is a concern if you are a general partner.
A corporation is a separate legal entity. This provides you as the owner the greatest level of protection. The corporate assets are exposed but not your assets. A C corporation requires the most planning and compliance with regulations and is expensive to form; you’ll likely need to enlist experienced corporate attorneys to form a C Corp. Additionally, a corporation receives what some call double taxation. The corporation is taxed at the state and federal level, and the shareholders are taxed at the personal level. Perhaps the greatest advantage of a corporation is its ability to raise money and sell shares of stock.
An S corporation is something of a hybrid entity. It offers you as an owner a shield against liability, yet the corporation itself is not taxed. The rules and regulations are similar although somewhat less complex than a C corporation, and there are restrictions on who may own an S corporation and the type of stock it may issue.
Limited Liability Company
An LLC has many of the best parts of a partnership and a corporation. Similar to an S corporation in offering liability protection and no double taxation, an LLC has greater freedom in ownership. According to Texas LLC Pros, other pros of this business entity include perpetual existence, minimal formalities, and management flexibility.
Selecting the most appropriate type of business entity is an important decision you should make with the guidance of an experienced legal professional well-versed in business law.