You have your business concept. Now what? Where do you start? To help you decide on choosing a business structure, we want to help you take a look at the most commonly formed business entities in the US. Hopefully, you will find a profitable business model that strikes a balance between benefit and liability.
The most commonly formed business entities (discussed below) are considered the “low-to-medium” in the difficulty of formation.
Are you a one-person show? If so, a sole proprietorship may be the ticket. It is the simplest, most commonly formed business structure in the US. This business entity is the least expensive to get going and offers the fewest legal restrictions and reporting requirements with government agencies. You are truly the boss. This business operates at your discretion, and you can terminate this business at your will.
Be aware that you are solely responsible for everything in a sole proprietorship. This includes filing business and personal (and self-employment) taxes and assuming personal liability for anything that goes wrong (i.e., debts). Your credit score may be affected by your business, and raising capital can be a problem. Creditors understand the risks of lending to a sole proprietor who may experience unplanned/untimely difficulty meeting their financial commitments (i.e., illness).
In a general partnership, you share business liability and rewards with your partner(s). This means you have chosen to partner with one or more persons whose skills and experience complement yours. They contribute money, labor, and talent to the business. Together, you bring creative possibilities to business and your decision-making, and you have increased your ability to access capital to grow a successful business. However, you will want to formalize your arrangement in a written partnership agreement.
Partnerships can be delayed when equal partners cannot reach agreements in decision-making.
Each partner is responsible for paying their taxes on their share of income and can claim deductions for losses. You want to be advised on how your partnership is addressing business deductions.
What if you want to separate your liability from your company’s liability?
Limited Liability Company
Small businesses often choose an LLC, as it provides the benefits of corporation and partnership, offering protection from personal liability in most cases. You will still pay self-employment taxes. Note that changes to the membership in the LLC may require dissolving the business and reforming it later (this varies by state). Having provisions in writing of how changes will be managed may prevent this problem.
A corporation (often called a “C-Corp”) is a legal entity with a “life of its own”. This entity type provides the strongest liability separation between you and your business. A corporation is more costly to form, pays taxes, owns property, and makes contracts. The C-Corp requires extensive record-keeping and reporting. It can raise capital through the sale of stock. If you foresee funding options like going public or seeking venture capital in your future, a corporation may support your vision.
You have the drive and the concept to see your business come to life. You have considered the most common types of businesses, and have an idea about how to choose one that is right for you.