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Starting a Business

Choosing A Business Structure

Choosing a business structure is one of the most important decisions you’ll make when starting your business. The legal structure you select will impact how much paperwork you need to fill out, how much tax you pay, and what level of personal liability you face should your business make a legal misstep or end up in the hot seat when an individual sues. Every situation is unique and it’s recommended that you consult multiple business and finance experts in your decision-making process.


Where To Get Advice

If you have the dough, you may consult a personal attorney or accountant who can become a lifetime partner with your business. If you’re trying to conserve every penny at this point, there are no or low cost alternatives at the Small Business Administration or the Service Corps of Retired Executives. 


Types of Legal Entities

The most common business entities include:


  • Sole Proprietorship
  • PROS: This is the most common form of business organization because it is easiest and least expensive to form. As an owner, you will receive complete managerial control and you will report all profit or loss on your personal income tax forms. 
     CONS: This also means you are liable for all business debts and you have no protection of your personal assets (like your car or home) if the business fares poorly. It’s also harder to secure external financing.

  • Partnership

    PROS: You share the profits or losses with another person. This organization is also simple and inexpensive to set up and you can share the tax burden with your partner on your personal income tax forms.
    CONS: Like a sole proprietorship, both partners will be financially liable for the business debts. There is no personal asset protection involved and financing can be more complex.

  • Corporation

    PROS: All owners have limited debt liabilities in a corporation, fringe benefits can be deducted as “business expenses,” and profit can be split among the corporation and its various owners for a reduced tax burden.
    CONS: It’s more expensive and complex to file for this business structure. The paperwork can be a burden because you are essentially creating a separate, taxable legal entity.
    *Note: You may choose the traditional “C Corp” or an “S Corp” status. Filing as an S Corp allows income or losses to be reported on individual tax returns to avoid double taxation.

  • Limited Liability Company (LLC)

    PROS:  Owners are shielded from personal liability for business debts, even if they are managers. LLCs can choose between being taxed as a partnership or a corporation. There is also less paperwork to file, compared to a corporation.
    CONS: It’s more expensive to create an LLC. Also, state laws aren’t always current in reflecting the latest tax codes pertaining to LLCs.


What’s Next?

Once you decide what type of structure you’d like, you can then proceed to filing. Some people go through their accountants to do this, while others may look for an inexpensive corporate filing company that will mail them a package of all the forms they need or even complete everything full-service. Others still may decide to look up the paperwork online and piece it all together themselves. Choosing the right business structure makes life easy, but keep in mind that you can always change your legal entity later if circumstances change.



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Related Articles:
Nolo: Pros & Cons of Different Business Structures
Entrepreneur: Choose Your Business Structure

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