which business structure to choose for your company

the four legal structures you can choose from

So you’ve started a business! You’ve had to develop your offerings, brand name, brand identity, operating processes, website, packaging, and customer liaison process, and you haven’t even launched yet! Don’t worry, though. There’s just one more step to completing your brand setup process, but it’s a crucial one. To legally operate as a business within the US tax structure, you’ll need to register your business as a legal entity. This allows you to be tax compliant and also, in certain instances, may set you up to receive help from the government. But what options are there to choose from? And which one is right for your business? ” Before you take the leap and make a business structure decision for your company,” Forbes says, “get to know the various entities like the back of your hand.” In this blog, we’ll outline the types of legal business structures and the significant advantages and disadvantages of each one.

1. a sole proprietorship.

Sole proprietorships are the simplest AND most common type of business structure registered in the USA. In this structure, the business belongs to a single individual, and there is no legal differentiation between “owner” and “business.” You are liable to pay the taxes incurred by your business’s income as you and the company are legally one entity.

A sole proprietor is personally liable for keeping their financial records and reporting to/paying taxes to the IRS timeously and accurately. You don’t need any documentation to BECOME a sole proprietor. For example, if you’re a freelance social media manager invoicing customers, you already are one. What you do need to be aware of is the fact that you need to file specific business permits and licenses to operate legally. The U.S. Small Business Administration has put together a short guide to help you understand this liability process here.

PROS OF A SOLE PROPRIETORSHIP
– It’s quick and easy to start! It’s the cheapest out of all the business structures to legally register and takes the least time and effort to get officially recognized.
– You can control everything! As the sole business owner, you have the final say in all choices, so your word is the law.
– Tax is much easier to file when the only flow of income comes straight through you. 

CONS OF A SOLE PROPRIETORSHIP
– Because you’re not legally separated from your business, if the organization goes into debt, you do too. 
– You can’t raise any money for new ventures by selling stocks in your business to investors. 
– It’s all up to you what happens with the business. If it succeeds, great! But if it fails or stagnates, that’s your responsibility, and due to your choices alone.

TAX TAXES SOLE PROPRIETORSHIP REGISTERING YOUR BUSINESS

2. a partnership.

Partnerships are the easiest way for two or more people to take ownership of a business together. Each partner has an equal share in the profits and losses that the company makes, or at least proportionate to the amount of the shares in the business they own. Each partner will report their income independently to the IRS and is directly responsible for paying their share of the taxes they owe. You can enter into a partnership via verbal agreement or a handshake, but written contracts are the most advisable. Once you’ve picked your partner, you’ll need to register as a partnership with the IRS, specifying your liability percentages for taxation purposes. 

TAX TAXES SOLE PROPRIETORSHIP REGISTERING YOUR BUSINESS

PROS OF A PARTNERSHIP
You’re part of a team! You and your partner are in this together, so you have support and new ideas all the way through. 
– You can rely on one another financially. If one partner s experiencing a financial dip, the other may step in to help, and vice versa. 
– Taxes are still your and your partner’s responsibility, so they’re easier to file and manage

CONS OF A PARTNERSHIP
– If you and your partner have differences, you’re legally tied to one another. In the law’s eyes, you’re part of the same organization, so separating may be difficult.
– You could become liable for picking up a partner’s slack. If they stop contributing to your business financially, it may fall on your shoulders to put in extra cash.
– If partners decide to join or leave your business, you will probably have to value all the partnership assets, which can be costly.

3. an LLC.

LLCs (or limited liability corporations) bridge the gap between the personal liability structure of sole proprietorships and partnerships and the much larger, more regulated structure that makes up a “corporation.” This structure acts to separate your assets from those of your business legally. This means that if your business fails, your assets, such as your vehicle, house, and savings accounts, won’t be at risk for lawsuits or bankruptcy claims. What separates this structure from a “corporation” is that you can pass your profits and losses to “personal income” in the IRS taxation structure. As a member of an LLC, you will still be considered “self-employed” rather than employed by a corporate entity. This means that members of an LLC will still need to pay self-employment taxes and contributions. 

Depending on the initial membership agreement, members may join and leave an LLC whenever they wish. LLCs can be a good choice for medium or high-risk businesses, owners with significant personal assets they want to be protected, and owners who want to pay a lower tax rate than they would with a corporation.

PROS OF AN LLC
-You can form an LLC with as little as one person, but you can also have an unlimited number of members.
-You have less paperwork and lower filing costs than a corporation
– If your business fails, your assets won’t be at risk.

CONS OF AN LLC 
-As an LLC member, you can’t pay yourself wages.
– Unless you are running the LLC alone, the ownership of the business is spread across its members. This means that if you have friction with one of them, it’s time for EXPERT conflict management or completely restructuring your business. 
– If you’re looking for investors, they may be more likely to invest in a corporation, as the nature of LLCs is so flexible and may appear to be a high-risk investment. 

TAX TAXES SOLE PROPRIETORSHIP REGISTERING YOUR BUSINESS

4. a corporation.

Corporations are by far the most complex and regulated type of business to set up, but they’re worth it in the benefits they could have for you as a large business owner. The corporation structure completely separates the business owner and business as legal entities and separates the liabilities and obligations incurred by company operations from the owners’ responsibility. Because of this, these structures are pretty heavily regulated by the regional regulations of where they’re set up. 

Unlike LLCs, Corporations are taxed at different corporate tax rates than the self-employment bracket. There are two different types of corporations, classed as Subchapter Sand Subchapter C . Subchapter C companies can pass income and losses onto their shareholders to prevent extra taxation of their profits and avoid paying additional income taxes.

PROS OF A CORPORATION:
– As an owner, you have limited liability and increased personal asset protection.
– Your tax rate is capped at 27.5%
– Your corporation is well protected by the law and could end up being the beneficiary of tax breaks and economy-building packages in your area from the government and investors. 

CONS OF A CORPORATION:
– This is a complex and expensive business structure to create. You’re going to need legal counsel and a fair amount of capital to register your business this way, so it’s not ideal for small businesses. 
– Because the local government is protecting you, regulations mean you’re not totally and entirely in sole control of your business. 
– As a corporation, you don’t get to deduct as many expenses from your tax as a sole proprietor or partnership would. 

comparing the tax implications.

tax table business structure
tax blog table structure differences

(Source: Oracle NetSuite)

We know this might be a lot of information to consider, and we’d suggest seeking legal counsel or financial advice to figure out which business structure would be the best for the kind of business you’re trying to grow. At Dawning Digital, we’re committed to helping entrepreneurs such as yourself find the best solution for growing your brand, so we’ll gladly offer advice and guide you through the process of registering your company in our 12 Steps to Kickstart Your Business program. Not only will we help you with registration, but we’ll also help you with all the other startup steps too, like building a brand, creating your website, setting up your social media, and helping you find your groove as an entrepreneur. 

If you’re interested in finding out more about what we do, please feel free to schedule a consultation call with us. We can’t wait to meet you! 

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