How to choose a business structure

You’re starting a business. Sweet!

Choosing the right business structure is like picking out a treat from the candy store. Do you want to be a sole proprietorship? C corporation? Something else?

Your head starts to spin as you wonder how your choice will affect your taxes, as well as your growth potential. Everything looks good. Each option is full of sugar (both its plusses and minuses), and it’s easy to get overwhelmed by the options. The trick is to pick the candy that won’t make you feel sick after you eat it.

In this article, we’ll help you assess your options so you can figure out how to choose a business structure that will work for your business today and in the future.

Look at the candy

Before you make your selection, you should peruse all the offerings. You don’t want to grab the first giant gobstopper you see only to realize a moment later that you’re really in the mood for caramel.

Sole proprietorship

A sole proprietorship is the simplest type of business to establish—but it’s not a legal entity. Once an individual starts selling goods or services, he or she has created a sole proprietorship by default.

Limited Liability Company (LLC)

LLCs were created to provide liability protection that corporations enjoy without the double taxation. LLCs do not have to file business tax forms unless they have more than own owner.

S corporation

S corporations were created to encourage small and family business creation by eliminating the double taxation that conventional corporations are subjected to. Unlike single-person LLCs, all S corporations must file business tax forms.

C corporation

Ownership in a C corporation, usually called a corporation, is expressed through the issuance of shares, while the management of the corporation is governed by a board of directors, who are elected by the shareholders.

Nonprofit

A nonprofit corporation is a type of corporation that donates the revenues it generates to achieve a specific goal that is of public benefit.

Read the ingredients

Now that you’ve taken a look at all the options, it’s time to move closer and read the ingredients. This will help you figure out which business structure will suit your palate.

Sole proprietorship

The sole proprietorship is the simplest type of business to establish, but it is not a legal entity, meaning the law does not distinguish between the owner’s personal assets and the business’ obligations. Once an individual starts selling goods or services, he or she has, by default, created a sole proprietorship. For example, if you start selling your handmade ceramics on a website, you’ve created a sole proprietorship. This sole proprietorship is not legally separate from its owner.

Reasons to choose a sole proprietorship:

The owner can establish a sole proprietorship instantly, easily and inexpensively with very few ongoing formalities. If you’re working on a side project or doing a bit of consulting work, a sole proprietorship could be a good option.

Reasons to avoid a sole proprietorship:

The owner is subject to unlimited personal liability for business debts, losses, and liabilities. For example, if your ceramics business goes into debt, your personal assets, including your sweet ride (aka your 2006 Honda Civic) could be at risk. Also, obtaining capital, such as a bank loan, can be more difficult as lenders often require a more formal entity structure.

Who should choose a sole proprietorship?

A sole business owner who is willing to accept complete responsibility for the business' liabilities, as well as its income. The owner will be financially responsible for the business' debts, expenses and payables and creditors can garnish the sole proprietor's personal income if the business falters or fails. A sole proprietorship is good when you’re starting out and perfect for testing an idea, but it’s not a good long term solution.

Limited Liability Company (LLC)

LLCs were created to provide liability protection that corporations enjoy without the double taxation, which is when there are taxes for both business assets and personal assets. An LLC is like a combination between a sole proprietorship and a corporation. An LLC is a business structure that combines pass-through taxation with the limited liability of a corporation, which protects its owners. Basically, an LLC is like a chocolate covered gummy bear: the fruity goodness of a sole proprietorship and the rich creaminess of a corporation.

Reasons to choose an LLC:
LLCs offer the liability protection—meaning that sweet Civic is safe—without some of the formalities of a corporation. They also tend to be less expensive to set up. This structure offers even more attractions than an S corporation since there's no limit to the number of members in an LLC.

Reasons to avoid an LLC:
Depending how the entity elects to be taxed, you may have to pay self-employment tax on your share of the draw.

Who should choose an LLC?
This adaptable structure is popular among businesses that are just starting out and not totally sure how much they will grow in the first year or so.

S corporation

The S corporation, also known as the subchapter or small business corporation, is a tax code that was created to encourage small and family business creation while eliminating the double taxation of conventional corporations.

Reasons to choose an S corporation:

S corporations enjoy pass-through taxation and shareholders are typically not personally responsible for business debts and liabilities.

Reasons to avoid an S corporation:

S corporation may not have over 75 shareholders and those shareholders must be US citizens or legal residents of the United States.

Who should choose an S Corporation?

An S corporation is a great option for a business owner who's looking to pay themselves a salary and receive dividends. It will reduce the social security and Medicare taxes that they pay by making them an employee of the business. Unlike an LLC, an S corporation does not provide pass-through taxation. If you’re a solo business owner, an LLC is probably a better option for you.

C corporation

Ownership in a corporation is expressed through the issuance of shares. The management of the corporation is governed by a board of directors, who are elected by the shareholders.

The board of directors select officers who manage the day to day activities of the corporation; the officers sometimes own the business. The board of directors will draft bylaws for the corporation, which are basically written protocols that define the way the corporation will be governed.

Corporations are required to hold annual meetings for both the shareholders and the board of directors. The annual meetings are held to discuss and decide on important decisions that are faced by the corporation.

Reasons to choose a C corporation:

C corporations can have an unlimited number of shareholders and ownership is easily transferable through the sale of stock.

Reasons to avoid a C corporation:

C corporations may incur double taxation on corporate profits.

Who should choose a C corporation?

An entrepreneur planning to raise a large amount of money from venture capitalists or take the business public.

Nonprofit

A nonprofit corporation is a type of corporation that donates the revenues generated to achieve a specific goal that is of public benefit. A nonprofit corporation is formed by filing articles of incorporation, just as you would do for any other type of business.

Nonprofit corporations are allowed to create profits, however those profits must be used to preserve the existence and expansion of the corporation.

In order to be recognized as a nonprofit, the corporation must file and obtain the appropriate classification with the IRS. In the majority of cases, this means filing a 501(c)(3) with the IRS in order to receive the desired tax treatment.

Reasons to choose a nonprofit:

Nonprofits can apply for both federal and state tax exempt status. Some are eligible for public and private grants, making the obtainment of operating capital easier.

Reasons to avoid a nonprofit:

Nonprofits face ongoing formalities, such as holding and properly documenting regular meetings of directors. Filing for a tax exemption status can be an expensive and extensive process to gain approval.

Who should choose a nonprofit?

Someone involved with a charitable cause or looking to make a difference and wanting to allow individuals to donate money tax free, while shielding their personal assets from liability.

What’s the Best Candy for You?

To figure out which business structure will suit your needs, do your research and review your options. If you’re on top of the process, you won’t have much trouble. If you feel that you need further counseling, get advice from a business lawyer or an online filing service. These resources can help you determine which business structure will suit you now and into the future.

How to File

Once you’ve determined which business structure you want, you’ll need to file your business entity with the government. The easiest way to do this is to visit an online filing service, like IncFile. These services will prepare and file your paperwork for you, making it very easy to incorporate. Simply select your entity type and state of formation, and IncFile will help you get up and running.

This article was provided by Incfile.com, who helps entrepreneurs and small businesses get started. Their mission is it to provide a superior user experience at an unparalleled value.

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