As a small business owner, it is important to choose the right business structure for your business’s growth. The three most common business structures in the United States are sole proprietorships, partnerships, and corporations. There are different types of business structures, with the three most common ones in the United States being sole proprietorships, partnerships, and corporations.
To figure out what business structure will work best for your new business, you should make a business plan that explains your company’s objectives. An example of this would be if your goal for your business was to use it for charitable purposes, in which case you would want to file with your state as a tax-exempt organization.
The five most common types of businesses are: sole proprietorship, partnership, Limited Liability Company (LLC), corporation, and S corporation. When choosing a business structure, it is important to consider legal and tax implications. You should speak with an attorney or CPA to ensure that you are making the best decision for your business.
Before choosing your business structure
When deciding what type of business structure is right for you, there are a few factors to keep in mind:
Debt and liability
Starting a small business usually means that the business owner will be held personally liable for any debts the company incurs.
If your business is in an industry that has high liability risks, such as selling firearms or CBD, you may want to limit your personal liability. Although this process requires more initial paperwork and investment, the protection it offers is worth the expense.
Taxes
Think about whether you want to file your business’s taxes as an individual or as a business entity. Although most small business owners file their taxes individually, there are personal benefits to keeping your individual and business income and finances separate.
Partners or investors
If you are creating a business by yourself, you may want to choose a sole proprietorship structure. If there are going to be multiple partners involved, it might be a good idea to look into the different types of partnerships.
Depending on what you want in terms of debt and liability structure, as well as your tax preferences, you might want to set up a corporation. This could help you get investment money or tax-exempt status.
Types of businesses
The structure of your business will be based on the type of business you have. You will be able to adjust your business’s structure as it expands to better suit its needs.
There are many types of business structures, but choosing one doesn’t have to be confusing. This text simplifies the types of businesses to help you choose the best structure for you.
If you are a solopreneur
Since you are the only one running your business, you have complete control over it. You generated ideas for your business and got it started. New small businesses generally fall under this category.
If you want to be in complete control of your business and don’t mind having your personal and business assets merged together, you can run your business as a sole proprietorship. This type of business doesn’t have a storefront and is typically run by a single person.
Sole proprietorship
Sole proprietorships are owned by one person. If you do not register your business with your state, you are automatically considered a sole proprietorship. Sole proprietorships don’t have any liability or tax structure.
As the sole proprietor, you would be held personally responsible for any debts, liabilities, and taxes incurred by the business. You can choose to use a trade name or “Doing Business As” (DBA) rather than your personal name, but this will not provide any legal protections. The federal government may require you to register your DBA name for tax purposes. If you register your DBA, you will be given a federal tax ID number (EIN). This will allow you to open a business bank account.
Partnership
If you are looking to expand your business, you may want to consider partnering up with another company. This could help you increase your growth potential. If your business expands, more aspects can make you responsible, and as a sole proprietorship, you have no distinction between your personal and professional assets. A partnership would give you more protection.
LLC
An LLC offers many benefits and filing as a single member-managed LLC is one way to enjoy those benefits. Being a LLC would give you the same level of financial responsibility as a corporation, and your profits and losses would be reported on your individual tax return.
If you have partners
Two or more people who go into business together form a partnership. When deciding what type of partnership to form, you should take into account what type of liability each partner will be subject to.
General Partnership
A General Partnership lets you collaborate with one or more partners to combine your resources and expertise. You do not have to create a business entity with the state in order to do this. This means that each partner is independently responsible for the business’s debts and legal obligations. Ownership and profits are split evenly among all partners.
Limited Partnership
A Limited Partnership has one general partner who has unlimited liability, and all the other partners have limited liability. LLP’s are ideal for businesses that want to bring in investors who don’t want to be involved in the company’s day-to-day operations.
The general partner is responsible for the business’s day-to-day operations and is personally liable for any debts or losses the business incurs. All profits from the business go through the general partner’s tax return, so they have to pay their own self-employment taxes.
The limited partner or partners are investors who have limited liability and limited control of the company. You and your business partner(s) should create a partnership agreement which details each person’s debts and liabilities. This will help to prevent misunderstandings and disagreements later on.
Limited Liability Partnership
An LLP is a business that is similar to a general partnership, with all owners actively participating in the business. It provides limited liability to all partners as defined by the partnership agreement. The owners are not held responsible for any debts the partnership incurs, and are protected from any actions taken by the other partners.
LLPs are not permitted in all states. This is often the case for certain professions, such as lawyers, doctors, and accountants.
Limited Liability Company (LLC)
An LLC provides the benefits of both partnership and corporation business structures. If you are in a partnership and your business is growing, this is a good option to explore. An LLC can help protect you and your business partners from liability in a similar way that corporations do.
If you have partners, you can share profits and losses with other partners, but they do not have to be divided equally among them. An LLC also gives the owners the ability to have their earnings and losses pass through to them on their personal tax returns.
LLC creation
To create an LLC, you have to submit an application to your state. You will then be responsible for an annual fee. The cost varies depending on the state, but is typically $100-$200.
An LLC is governed by an operating agreement. If you are a single-member LLC, it can be beneficial to have a standard operating agreement in place from your state. However, if you have multiple members, you will need to tailor the operating agreement to your situation.
LLC assets & liabilities
The most common type of business entity in the United States is the LLC, or Limited Liability Company. LLCs are preferred by business owners because they offer personal liability protection. To take advantage of the personal liability protection, you should treat your business as a separate entity. Having a separate bank account, business debit or credit card, business cards, and letterhead business stationary can help you keep your personal and business expenses separate.
Your personal assets are typically protected if your LLC goes bankrupt or is sued. However, if you use your personal assets to fund your business, you may run into issues with protecting those assets. Essentially, if your personal and business interests are linked, then your LLC is no longer a distinct entity.
LLC tax structure
As an LLC, you can choose to be taxed as a corporation, partnership, or sole proprietorship for both federal and state income purposes depending on your business needs and circumstances.
Types of LLCs
The type of LLC you choose should depend on the number of members, the type of protection you want for your business, and your local and federal tax rate.
It is important to discuss your options with an attorney or CPA before making any decisions that could have a major financial impact.
When it comes to LLCs, there are four options:
1. If you are a single-member LLC, you are taxed as a sole proprietor, which is considered “pass-through” taxation. Instead of your business filing its own tax forms, you will report your business income or loss on your own personal tax forms.
The amount of self-employment taxes you will have to pay depends on your net earnings from self-employment.
If you are invested in a passive activity, such as real estate, you do not have to pay self-employment taxes.
2. Multiple-member LLC as a partnership. If your LLC has two or more members, your LLC will be taxed federally as a partnership and you will have to report your business income on IRS Form 1065.
Each partner who is engaged in an active trade or business is responsible for paying their own self-employment taxes on their share of the partnership profit. You will also manage Medicare and Social Security.
A partner who is not actively involved in the business is not responsible for self-employment taxes.
states require you to dissolve your LLC if a member leaves.
3. LLC as a C corporation. If you choose to be taxed as a C corporation, your LLC will pay taxes using the corporate tax rate when you file.
Dividends that owners receive are taxed again at the qualifying dividend rate, which is known as double taxation.
This tax structure is designed for companies who would rather keep their profits within the company rather than distribute them to owners at the end of the year.
4. LLC as an S corporation. If you decide that you would like to be taxed as an S corporation for tax purposes, your LLC will have to file a corporate tax return. However, the company’s profits will not be subject to corporate income tax.
Each owner is taxed on their portion of the company’s profits.
Profits are not subject to self-employment tax. Your LLC will be responsible for paying payroll taxes to any members that work for the business.
If you want to have stockholders
If your business is doing well and growing, you may want to hire more employees and give them stock as part of their compensation. Other options for increasing your influence and revenue potential include working with business partners.
In this instance, choosing to form a corporation would be the best course of action.
A corporation is able to generate profit, be taxed, and be held accountable for its employees’ actions. Since corporations offer the best protection from personal liability, they require a lot of investment in record-keeping, operation processes, and reporting.
If you are planning on running a medium to high-risk business, it is better to form a corporation. This type of business structure is better for raising money and can eventually be sold.
There are a few different types of corporations and which one you choose depends on a few factors:
C Corporation
A C corporation is the basic type of corporation. If you register your business as a corporation, it will be considered a C corporation by the state, unless you choose another type of corporation.
C corporation creation
If you want to start a corporation, you’ll need to get specific information from your state government about how to do it, and then register your business with the state. The Small Business Administration website provides links to state business offices.
You will need to file articles of incorporation, write your corporate bylaws, and hold an initial board of directors meeting. You will need to file with the federal IRS in addition to your state taxes.
C corporation assets & liabilities
Corporations exist separately from their shareholders, meaning that even if a shareholder leaves or sells their shares, the corporation can still operate.
C corporations can attract employees by selling stock and raising capital.
C corporation tax structure
A C corporation pays its federal taxes using its corporate tax rate.
C corporations pay income tax on their profits. In some cases, profits and dividends can both be taxed.
Only profits from a C corporation are subject to taxation, and these profits are not subject to self-employment taxes. Your business will be responsible for payroll taxes to members that work for the business instead of the government.
S Corporation
An S corporation is a corporate structure designed to avoid the double taxation drawback that occurs with C corporations.
To meet S corporation status, your business must meet these requirements:
- Be a domestic corporation.
- Have only allowable shareholders.
- Have no more than 100 shareholders.
- Have only one class of stock.
- Not be an ineligible corporation (including certain financial institutions, insurance companies, and domestic international sales corporations).
S corporation creation
To get S corp status with the IRS, you must file a different form than the one you use to register your business with the state. Even though your corporation will be classified as an S corporation, it will still need to adhere to the same rigorous filing and operating procedures as a C corporation.
What type of business structure is right for you?
The business structure you choose for your online business should be based on the purpose and goals of your business. You can always change your business organization in the future if necessary. If you want to get started with owning your own business, you might want to look into becoming a sole proprietor or having an LLC. As your business begins to grow, you can eventually become a corporation.
Ecommerce business plans are designed to help you assess every major component of your online business and identify any potential issues before you get started. Constant Contact offers advice on how to transition and grow your ecommerce business.
No matter what business structure you are considering, it is a good idea to speak to an attorney or Certified Public Accountant (CPA) to find out the best first step for your business.
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