Choosing the Right Structure for Your Business

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The structure you choose for your small business affects things like your taxes, your day to day operations, and even whether or not you could lose your house. 

So, should you be a sole proprietor, LLC, or something else?


Sole Proprietorship:

The simplest business form, a Sole Proprietorship is easy to set up and actually isn't a legal entity at all. It is a business that has no legal separation from its owner, which comes with both benefits and risks. 

Pros:

  • If you do any kind of business and haven’t registered as anything else, you are automatically a sole proprietor and have complete control of your business. Congratulations!

  • Super easy set up. You don’t need to register with the state or fill out any legal forms (but you might still want to get yourself an EIN or file a fictitious business name with your state if operating under anything other than your legal name).

  • Taxes are simple and straightforward -- all of your business's income and losses are taxed on your personal income tax return.

Cons:

  • There’s no separation between personal and business assets and liabilities, which means you’ll be held personally liable for things like debt and any lawsuits that could arise. This can potentially put your personal accounts, savings, assets, and credit score at risk.

This is good for you if:

  • You’re a low-risk business and want to dip your toes in the water before taking the full plunge into a formal business model.


LLC (Limited Liability Company)

Another common option for small businesses (and a step up from sole proprietorship), an LLC has fewer requirements and more flexibility than a corporation.

Pros:

  • That limited liability protection. Your personal assets are separate from your company’s so if you ever face bankruptcy or a lawsuit, your house and savings account will stay safe.

  • Minimal requirements. Unlike a corporation, you’re not held to formalities like annual shareholder meetings and keeping minutes.

  • LLCs can also elect whether they want to be taxed as a corporation or S corporation, instead of a partnership or sole proprietorship. Learn about the advantages, disadvantages, when this might be beneficial, and how to make the election here.

Cons:

  • You’ll probably be paying self-employment tax, which could be higher than the corporate rate. (Get your accountant or financial adviser on the phone if you need more clarity.)

  • This depends on your state but if you have more than one LLC member and someone leaves, the LLC dissolves and you’ll have to start a new one from scratch.

This is good for you if:

  • Your business is medium or high(er) risk, you’ve got assets to protect, and want to keep paperwork and fees to a minimum.


Other business structures that may apply to you now or later on as you grow:

  • Partnerships: the simplest structure for when there are two or more owners in the business. Choose between an LP (limited partnerships) or LLP (limited liability partnerships).

  • S-Corporation: a special kind of corporation that helps you avoid paying the double tax that corporations do (they have to pay on profits and dividends).

  • Corporation: also called a C-corp, this gives owners the most protection from personal liability, but it costs more to set up, has that 2x tax, and stricter requirements. 


If you’re ready to take the next step:

It's easy to form an LLC yourself (more on that here), but if you want peace of mind and to have it done fast and right the first time by pros, launch your business for only $49 + state fee (which varies by state, but is usually around $100 - $200) with IncFile.

While our goal is to offer no-BS info to guide you on your path to entrepreneurship, we aren't attorneys so we can't give you legal advice. 

If you have any questions, we suggest sitting down with a pro to discuss the best long-term options for your biz.


Jessica Zepeda