When starting a business, a lot of newbie entrepreneurs overlook what is one of the most key components to their business: selecting an appropriate business structure. By default, your business will operate as a sole proprietorship, but you won’t get any legal protection should your business be sued. You need to consider forming an LLC or corporation as your setup your business. If you’re serious about being in business for years to come, it’s a wise idea to form a legal entity. Do you homework and consult with professional about the “right” legal structure for your business. Here’s what you need to know about how to choose the best business structure for your small business.
Benefits to Incorporating
First, consider making your business a corporation. Corporations — especially the S-Corp, is a popular option for small businesses — provide ample benefits that a sole proprietorship does not.
With a corporation, your personal assets are protected. Once your business is incorporated, it exists as a separate legal entity from you. In the event that you are sued or file bankruptcy, the corporation — not you, the owner — is responsible for all of its debts and liabilities. So your personal assets, like your home or savings, can’t be touched to pay your business debt. They can, on the other hand, be used to cover your business debt if you are a sole proprietor.
Incorporating also has tax perks. Through an S-Corp, you can use what’s called pass-through taxation. That’s a fancy way of saying that an S-Corp is taxed more like a sole proprietor or a partnership than as a separate entity, the way a C Corporation is. So company profits are “passed through” and reported on your personal income tax return. You get taxed only once on your revenue. End of story.
Benefits to Forming an LLC
An LLC has many of the same tax and personal asset protection benefits as a corporation. In fact, when it comes to taxes, there’s a lot more flexibility in how you file, as you can file as a:
- Dual Member: Partnership
- Single Member
An additional perk is that LLCs require a little less red tape and annual paperwork to file, than an S-Corp.
Which to Choose?
Ultimately, the decision on which business structure to set up for your small business will come down to preferences. Speak to a lawyer or tax professional about the benefits of each for your specific benefits. The goal, no matter which you select, is to make sure your business and personal assets are protected, and that you have the best setup for taxes (after all, who wants to pay more than they have to?).
Keep in mind you may need to file paperwork or pay fees to remain compliant with either structure. Do all the research necessary to determine exactly how much work you’ll need to put into maintaining your business structure status, or look to companies who can manage the maintenance on your behalf.