Determining the Right Business Structure for Your Company
How you structure your business can have an impact on the operations of your business. It can determine how the IRS taxes your business and it can determine how your property is protected. It can also affect you you manage your business and plan for the future. Because of all these possibilities, it’s important to determine the business structure that is right for your company’s needs.
1. Sole Proprietor
The sole proprietorship is owned by one person and is unincorporated. Essentially, you and your business are inseparable in the eyes of the IRS and your business profits are filed on your individual tax return. This is the simplest of all business structures.
A partnership is like a sole proprietorship, except there are two owners who split the profits on each individual’s tax return. Partnerships are a little more complicated in that there are different types that define the involvement and role of each partner. These types include general partnerships and limited liability partnerships.
3. Limited Liability Company
The LLC protects the owner from personal liability. Basically, in this type of business structure, if the business falters or fails, your personal assets will be safe against seizure by the bank.
4. S Corporation
An S Corporation has stockholders who report the business’s profits on their individual tax returns. Like the LLC, the shareholders have limited liability. In order to hold stock in an S-corp, the individual must not be another for-profit business and should be a U.S. citizen or at minimum a green card holder.
5. C Corporation
A C-corp is also comprised of shareholders who have limited liability. The C-corp shareholders are only taxed when earnings are distributed. Otherwise, only the business is taxed.
Both types of corporations are required to be overseen by a board of directors.
When deciding which business structure is right for you, you must determine the risk you are willing to take and how you want management to operate. For a small business that needs to keep things simple, choosing a non corporate structure may be right starting out. For a business that is looking to grow fast, adding shareholders can provide the cash to achieve that fast growth.
As the business grows, a company can reorganize and change structures. If it restructures into a corporation, keep in mind the complexity of the business needs will increase and you will need to hire an attorney and an account to navigate stringent corporate laws.