Inquiry Monday: What Business Structure Should I Choose?

When forming your own business, you must choose a business structure to operate under. There are many to choose from, each with their own pros and cons regarding costs, personal liability, tax regulations and a variety of other legal issues. I will outline the basics of the major business structures that will apply to most small business, giving you some helpful information as you choose what is right for your business. As you decide, please refer to the Resources page on the LDS Women In Business website for your state’s specific requirements.

Sole Proprietorship: This is the most uncomplicated of business structures. The business is owned by one individual or a married couple and the business name is most commonly the individual’s name. You may choose to give your SP another name, but must file a “DBA” or “Doing Business As” registration in your state. The owner of a sole proprietorship is personally liable for all business debt and can file their business income on their personal income tax form. Very simplistic and inexpensive. This structure is ideal for a service or one product business. I used this business structure when I operated my photography business and it worked out well for me. The downside is the liability issue. If someone goes after you in a lawsuit, your personal assets could be taken, including your house, cars and money in your bank accounts.

Limited Liability Company (LLC): If a sole proprietorship feels a little too risky for you, another option might be the LLC. If you choose, you can maintain the ability to file your business taxes with your personal income taxes, but can also have some personal liability protection. LLCs are a very popular structure choice for small businesses. There is no company stock. Multiple owners are called members and each is assigned a percentage of ownership, defining the share of profit they get or the loss they can claim. You are able to choose to pass profits and losses down to these members or you can be taxed like a corporation. The downside is the small, additional expenses and you will have to file an annual report every year with your state. It is also recommended, to take advantage of the liability protection, to write up a limited liability operating agreement. You can find examples of agreements on the internet to help you create this document, or you can use a service like Legal Zoom. I use the LLC structure with my current business because I have a product that could be susceptible to lawsuits and I wanted to protect my personal assets.

General Partnership: If you are going into business with two or more people, this option may be something you might choose. Short term partnerships can be formed and are called “Joint Ventures”. Partnerships are inexpensive to create and uncomplicated as far as tax reporting. These partners must sign an agreement to operate a business and each partner is personally and equally liable for all business debts under this structure. Partners report their share of profits and losses on their personal income tax forms, but an additional informative return must also be filed.

Sub Chapter S Corporation (Inc. or Ltd.): Chapter S corporations are a mini version of a corporation and while they are a more complicated structure than an LLC or an SP, they are much less expensive than a C corporation and you can avoid the double taxation that occurs when the corporation and the individual stock holder is taxed. Only the individual stock holder is taxed under an S corp. You would still have to adhere to corporate formalities like issuing stock certificates, holding annual meeting and electing board members.

C Corporation (Inc. or Ltd.): This is the most complicated and expensive structure. Very few small businesses should even consider, or even need this option. If you do choose this, an attorney should definitely assist in this formation. A corporation is a legal entity that is completely separate from the owners, or shareholders. There is no personal liability unless corporate formalities like those listed above are not followed. Profits are taxed at the corporate level and then again when those profits are passed to shareholders. Corporations can be for profit or non-profit and are subject to higher licensing fees and more government regulation than the other business structures.

So there you have it! Business structures at a glance. Although this may not have been one of the most entertaining questions, it is a necessity that must be decided on when starting a business. A structure may also need to be changed as a business grows. Hopefully this article will help in the process of your business formation and assist you in making the correct decisions regarding business structure. You may also want to refer to the IRS website for additional taxing information. Lastly, the most important resource in your decision will be prayer. Remember who your main business partner is! He can help you in every step of the way.