Starting A Business: Choosing a Business Structure for Your New Company
This post continues the series on Starting A Business. This installment deals with choosing a business structure for the formation of your new company.
Choosing the right business structure for your personal situation is one of the first decisions you will have to make when you start a business. Just like daughters are different than sons, a Sole Proprietorship is much different than a Corporation or LLC (Limited Liability Company). They have many similarities but at their core, they are very different. In this post I will explain the differences between the business structures and provide you with information that will help you make the decision about which is right for you.
When making the decision about how to structure your new company, some of the things you need to consider are:
- personal liability
- taxes
- management structure
- will you be seeking outside financing
- selling the business
Here is a list of the most common business structures and a brief description of each:
- Sole Proprietor
- General Partnership
- Corporation
- Limited Liability Company (LLC)
Here is a brief description of each business structure and some information to help you decide which is best for you.
SOLE PROPRIETORSHIP:
This is the most common and the simplest form of a business. With a Sole Proprietorship, an individual just goes into business without any formal organization. If you want to have a business name, a DBA (Doing Business As) or Trade Name is filed with the state. Owners are personally liable for all debts of the business.
GENERAL PARTNERSHIP:
A general partnership is created when two or more people associate to carry on a business for profit. A partnership generally operates according to a partnership agreement, but this is not required. Like with a Sole Proprietorship, the owners are personally liable for all debts of the business.
CORPORATION (C Corporation):
A corporation is a legal entity, separate from its owners (called “shareholders.”) This is why a corporation limits the liability of its owners. Forming a corporation is a great way to protect your personal assets from company liabilities such as lawsuits and debts. It also makes it easier to seek outside investment, there are tax advantages, and it makes it easier to transfer ownership. The people who manage the business of a corporation are
called “directors.” Corporations are complicated. Every state has different rules, and the names for things vary slightly from state to state. A corporation is generally created by filing a document called Articles of Incorporation, with your state.
Some downsides of a corporation are that there are formalities and record keeping requirements like formal board and shareholder meetings, keeping “corporate minutes” and filing Annual Reports. You are also taxed more, as the corporation pays taxes on income, and the shareholders are taxed on any profits that are distributed.
LIMITED LIABILITY COMPANY:
A Limited Liability Company (LLC) combines some of the characteristics and flexibility of a partnership, and the liability protection of a corporation. It is formed by filing Articles of Organization with your state. The owners of an LLC are called “members.” Generally, the liability of the members is limited to their investment.
The advantages of an LLC are that generally, any income or loss is passed through to the members (as in a partnership or sole proprietorship), so the entity is not taxed like in a corporation. So the owners get the liability protection of a corporation with less formalities, paperwork, and accounting.
S Corporation (“S Corp”)
An “S” corporation is not a different entity, but a federal tax election. There are tax rules that can make it advantageous for small businesses to elect be “S” corporations, but you should contact the IRS or a competent accountant regarding this decision. You can apply for both a Corporation (C Corp)or an LLC (Limited Liability Company) to be taxed as an S Corporation.
Your Decision
It can be very confusing to try to decide which entity is right for you. One of the things I am going to try to do is not just give you information, but when I can, guide you with advice. So with the understanding that I am NOT a lawyer or an accountant, here is my take on things.
I highly recommend forming a Limited Liability Company (LLC) or Corporation. There is too much liability in this lawsuit happy society of ours, to have a Sole Proprietorship or General Partnership. You need to protect yourself. I have had both, and the LLC is less paperwork and accounting on an ongoing basis. It limits your liability and protects your assets like a corporation, but without the burden of corporate maintenance. That’s why the LLC is becoming the most popular way to start a business, and why it is the business structure I chose for my new company.
COSTS
The process and cost to establish them is about the same. Once you decide which one you want, establishing a business entity is usually not that complicated or too expensive. If you have never done it before, I recommend hiring someone to file the paperwork. A lawyer can cost over $1,000, but there are businesses that provide this service on your area, for much less. The cost varies, but on average should be around $300-$500.
I have a recommended resource that will file an LLC for you for as little as $149, and a Corporation for as little as$139. You will also have to pay the state filling fee, and have the fillings published in a local newspaper. This will add about $150. So for about $300, you can have professionals prepare your paperwork, and you have a company.
Whichever way you decide to go, form the entity and get OFFICIALLY IN BUSINESS! For my new company, I am using the resource I recommended above to file an LLC. To save money, I opt not to do all of the fancy embossed kits and expedited services. If you really want that stuff, reward yourself later.
Next up in the Starting A Business Series– Setting up your website.