With the many types of business structures to choose from, how do you know which one is the one for you? Well, the answer to this question all depends on what your business goals are. In order to choose the right one, you need to familiarize yourself with each first. It’s also good to hire a good business structure consultant to help you out. Check out Incfile reviews to see how Incfile can help with your business structure.
There are three main types of business structures to choose from. We’ll discuss each of them one by one.
- Sole Proprietorship
The sole proprietorship is the easiest to form and the easiest to manage. This is because you are the sole owner of the business, so you will make all the decisions. Furthermore, you will get all the profits of the business. The downside is that you also have to absorb all debts and liabilities of the company.
A partnership has similar legal implications as the sole proprietorship but with partners. The advantage of a partnership is that the overhead expenses are shared by the partners and the management is done by all partners. The downside is that the profits are split among the partners by ratio of investment and so are the debts and liabilities.
The last type is a corporation. The standard type of corporation is the C corporation and is a separate entity from its owners. This makes it both a separate legal entity and taxable entity. That said, a corporation has its own legal identity and pays its taxes outside of the identities of its shareholders. The exemption to the rule is the S corporations, wherein the shareholders of S corporations pay the income tax. While S corporations save more money, they are harder to form because of stricter rulings.
How Do I Choose Which One?
While each has its own respective pros and cons, how do you choose which of the three as your business structure? You may follow this criterion to help you:
- Legal Liability
The first thing to look at is a legal liability. Legal liability refers to whether or not your personal assets will be used to pay for your liabilities. Choose the best one based on your preference for legal liability. The best is the corporation or a Limited Liability Corporation because your personal assets won’t be touched. A limited liability corporation is a hybrid of a partnership and a corporation. It has the legal identity of a partnership but with the legal liability of a corporation. Just like a corporation, an LLC doesn’t save you any tax and also requires you to pay self-employment tax.
The next thing to factor in is tax implications. With regards to tax, the sole proprietorship and partnership are the best because they have the lowest tax rates. Corporations have the highest tax rate excluding S corporations.
- Overhead Capital
You must also take into consideration the capital that you can raise. Obviously, the sole proprietorship is the cheapest and the corporation is the most expensive. You decide on this based on how much money you think you can pump in.
Lastly, you must think about your partners. Your partners are essential to the success of your business because making a business work is a team effort. If you can’t find good partners, then you’re definitely going to have to go for a sole proprietorship. If you can find good partners, then a partnership or corporation is good.