Unfortunately, starting a business is not as simple as choosing a name and selling your products or services. There are several steps you need to take – register your business with the state, get a tax ID number, and file for any required licenses and permits. Before you can register your business, you’ll need to select a business structure.
What is a business structure?
Business structure is the legal structure of your company that influences the day-to-day operations of your business. The structure selected will define who owns the business and how the profits will be distributed.
Why is the business structure I choose important?
The structure you choose will determine how much you’ll pay in taxes, your ability to raise capital, the paperwork you’ll need to file and your personal liability.
What are my options?
There are 5 common types of business structures in the US. They are:
Sole Proprietorship
This is one of the most common structures because it’s typically the easiest to set up. In this structure, one person owns and runs the business. Income and expenses are reported on the owner’s personal tax returns since the business is not legally a separate entity. With this structure, the owner will be liable for debt and losses.
Partnership
A partnership is an unincorporated business that has 2 or more people that own and operate the business. Any profits are divided among all partners and reported on their personal tax returns.
There are 2 types of partnerships – general and limited. The partners in general partnerships have equal roles in owning and operating the company. A limited partnership includes both general and limited partners. Limited partners have limited input into the operation of the business and limited (or no) liability related to the business.
Corporation
A corporation (or C corp) is an entity separate from its owners. Profits are taxed both on the business level and on an individual basis when earnings are distributed to shareholders. Since a C corp is a legal entity, it can be held legally liable. While this structure is more complex and requires more extensive record-keeping and reporting, it also provides the most protection to the owners from personal liability.
S Corporation
An S corporation (or S corp) provides the liability protection of a C corporation along with added tax benefits, but the business must meet specific IRS criteria. There are 2 main limitations – the business can’t have more than 100 shareholders and all shareholders must be US citizens. There is no double taxation, shareholders aren’t personally liable for the business’s debts and liabilities, and the business is an independent entity.
Limited Liability Company (LLC)
This hybrid structure limits the personal liability of the owner(s) while allowing the profits to be taxed at the member (owner) level or corporate level.
What is the easiest business structure to form?
The easiest structure is the sole proprietorship since there’s only one person that both owns and runs the business. In this structure, the business is not legally regarded as a separate entity so there are no additional forms or government fees, and profits and losses are reported on your personal income taxes.
Can you change your business structure?
While you can change the structure of your business, it can be costly and complicated resulting in tax consequences and other complications.
It’s best to consult with your accountant and/or attorney before selecting your business structure to ensure that you choose the structure that is the best fit for your particular situation.
Ready to get started?
Tax Smart Advisors is your one-stop shop for new businesses. We can help you choose the best business structure for your situation, register your new business with the state, set up your accounting system and make sure you’re prepared for your first year as a new business owner! Contact us today to get started.
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