Once you’ve decided to start a small business, you need to pick a business structure. The type of structure you choose can affect four major areas, according to the SBA:
How much you pay in taxesAdvertisement
Whether or not you can raise money
Which paperwork you need to file
Your personal liability
You don’t need to have the future of your business completely mapped out years before making a decision; the business structure you choose now may change in the future. With that said, you do want to be mindful of your choice, and you should consult with legal and financial professionals if you need to make a change down the line to avoid any unintended consequences.
There are several types of business structures. Here are the most common five, as stated by the IRS, at a glance:
The SBA provides a brief description of each one.
A sole proprietorship is the most common type of business structure and is pretty easy to form. This is a solid choice for most new business owners who are just getting their feet wet or intentionally keeping things small. However, a sole proprietorship is not considered a separate business entity, which means you are personally held responsible for any business debts and obligations.
A partnership consists of two or more people. There are two popular types: limited partnerships (LP) and limited liability partnerships (LLP). This could be a good option for groups with multiple owners, though there are tax and liability considerations you should review to see if a partnership is a fit for your situation.
A corporation, also known as a C corporation, is a business structure separate from its owners – meaning, it offers you protection from personal liability. This type of partnership can be complex and typically costs more to form, but it may be a good choice if you’re looking to raise money and/or sell it down the road.
An S corporation, also known as an S corp, is a structure that can help business owners avoid the double taxation that’s present in C corps. It may be a decent choice for a would-be C corp that meets the particular qualifications of an S corp. However, some states don’t recognize S corps and others tax S corps on profits above a certain limit.
A limited liability company (LLC) has benefits of corporation and partnership designations, and it can protect you from personal liability in most cases. As such, choosing this business structure could be the right move for a medium- or high-risk business. Unlike other business structures, an LLC may need to be dissolved if there’s a shakeup of members.
You can refer to the IRS and SBA websites for more information and learn the pros and cons of each business designation. You should also consult with tax, business, and financial professionals about your options.