Entrepreneurs often start their businesses as sole proprietorships. A sole proprietorship is the simplest form of business organization and it is not a separate legal entity from the owner says Aron Govil. The owner of a sole proprietorship is personally liable for all the debts and obligations of the business. Partnerships are also popular among small businesses. A partnership is a business owned by two or more people. Like a sole proprietorship, a partnership is not a separate legal entity and the partners are personally liable for the debts and obligations of the business. Limited liability companies (LLCs) are another option for small businesses.
An LLC is a separate legal entity, which means that its owners (called members) are not personally liable for the debts and obligations of the business. LLCs offer the benefits of both sole proprietorships and partnerships, but with some added protections. Corporations are another option for small businesses. A corporation is a separate legal entity, which means that its owners (called shareholders) are not personally liable for the debts and obligations of the business. Corporations offer more formalities and protections than other business structures, but they also come with additional costs and requirements.
When deciding which business structure is best for your small business, you should consider the following factors:
1. The level of personal liability you are comfortable with:
Sole proprietorships and partnerships offer the least amount of personal liability protection, while corporations offer the most. If you are not comfortable with the idea of being personally liable for the debts and obligations of your business, then you should consider a corporation or LLC.
2. The level of formalities you are comfortable with:
Sole proprietorships and partnerships have minimal formalities, while corporations have more. If you are looking for a less formal business structure, then you should consider a sole proprietorship or partnership. If you want more formalities, then consider a corporation.
3. The amount of money you are starting with:
LLCs and corporations require more money to set-up than sole proprietorships and partnerships. If you are starting your business with limited funds, then you should consider a sole proprietorship or partnership.
4. The tax implications:
Sole proprietorships, partnerships, and LLCs are pass-through entities, which mean that the business income and losses are reported on the owner’s personal tax return. This can be advantageous because the owner can use Schedule C to deduct business expenses from their income. Corporations are not pass-through entities and the business income and losses are reported on a separate corporate tax return says Aron Govil. This can be disadvantageous because the corporation is taxed twice–once at the corporate level and again when the money is distributed to the shareholders.
5. The amount of state and federal regulations:
LLCs and corporations are subject to more state and federal regulations than sole proprietorships and partnerships. If you want less government regulation, then you should consider a sole proprietorship or partnership. If you want more regulation, then consider an LLC or corporation.
6. The amount of liability insurance you need:
All business structures except sole proprietorships are required to have liability insurance. The amount of insurance you need will depend on the business structure you choose.
7. The amount of paperwork you want to deal with:
Sole proprietorships and partnerships have the least amount of paperwork, while corporations have the most. If you don’t want to deal with a lot of paperwork, then consider a sole proprietorship or partnership. If you want more paperwork, then consider a corporation.
8. The number of owners:
The number of owners is limited in sole proprietorships and partnerships, but is unlimited in LLCs and corporations. If you want to have more than one owner, then you should consider an LLC or corporation.
9. The amount of control you want:
Sole proprietorships and partnerships offer the least amount of control, while corporations offer the most. If you want to have a lot of control over your business, then you should consider a corporation.
10. The amount of money you want to invest:
LLCs and corporations require more money to set up than sole proprietorships and partnerships. If you are looking to invest a lot of money in your business, then you should consider an LLC or corporation.
Conclusion:
There are a lot of things to consider when deciding on the structure of your small business says Aron Govil. The most important thing is to make sure that you choose a structure that fits your business and personal needs.