You wouldn’t build a house without blueprints, so don’t build a new business without first knowing what your business structure should be. The business structure you choose will influence your startup’s daily operations and functions, the taxes you are liable for, legal implications, and the extent your personal assets can be at risk.
A business structure is an organization created by an individual or individuals for the purpose of conducting business, trade, or actively engage in any functions of commerce. The four most common startup business structures are:
1. Sole proprietorship
A sole proprietor is a person who owns an unincorporated business by themselves. The sole proprietorship is the easiest structure to form. However, depending on your type of business, a sole proprietorship can be responsible for income tax, employee income tax withholdings, self-employment tax, estimated tax, Social Security taxes, Medicare taxes, federal unemployment tax (FUTA) and excise taxes. Also, it’s good to keep in mind that the person and business are considered one and the same in this type of entity. This means that the proprietor is held responsible for loss and liability.
2. Partnership
A partnership is a relationship or agreement between two people or more to conduct business or trade as a single entity. Each partner contributes money, property, or labor and shares in profit or loss of the company. Although a partnership does not pay income tax in a direct fashion, it must file an annual information return to report income, deductions, gains, and losses. The normal income tax responsibility passes its profits and losses between the partners. In turn, each partner reports their portion of the partnership income or loss on their individual tax return.
3. Corporation
Here is where things get a little more complicated. In general terms, a corporation is a company or group of people authorized to act as a single entity and is legally recognized as such. When a corporation is formed, shareholders exchange money, property, or both toward the corporation’s capital stock. Capital stock is the amount of common or preferred shares that the company is authorized to issue. Since the corporation is viewed legally as a single person, it usually takes the same deductions as a sole proprietorship but can also take special deductions. There are four types of corporations: C corporations, S Corporations, non-profit corporations, and Limited Liability Companies.
4. Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations; you should check with your state if you are interested in starting a Limited Liability Company. Establishing and maintaining an LLC is less complex and requires less paperwork than other corporate entities. An LLC registers its existence by filing articles of organization with and paying a fee to the relevant state office, usually the secretary of state.
Businesses like banks and insurance agencies cannot be declared LLCs. An LLC is viewed as a legal entity separate from its individual members or owners, making the LLC owner not personally liable for debts or legal liabilities accrued by the company.
We hope this doesn’t seem daunting, and we were careful not to include every kind of business structure here. Our intent was to inform and give you able footing as you march on with your business endeavor. Still unsure what type of entity your startup should be? Sinn Accounting can help. Our accountants are specialized in analyzing businesses to choose the best structure to maximize savings and limit liability. Contact us today, and let’s plan out your business structure so we can help build your success.
