One of the most important decisions to make when starting your own business is choosing the legal structure. This choice will impact a wide variety of things, including taxes, personal liability, paperwork and the ability to raise funds.
The type of legal entity you choose for your company depends on your individual circumstances. It is vital to consider the pros and cons of each structure when starting a business. Here is a look at the benefits and drawbacks of common business structures.
If you are a freelancer, consultant or small business owner, you may consider a sole proprietorship. It is easy to start and has no paperwork requirements. However, operating as a sole proprietor means you are personally liable for any debts or lawsuits against your business. Keep in mind that even if you start out as a sole proprietorship and want to change later, you can convert it to something else, such as a partnership, LLC or corporation.
A partnership is similar to a sole proprietorship, except it involves multiple owners. It is easy to start and operate a partnership. But each owner is liable for debts and legal action. Plus, partnership disputes can unravel the company, especially if there is no partnership agreement.
A C-corporation is a separate legal entity from its owners. Operating your company as a C-corp means owners are not personally liable. There are also lower self-employment taxes and more tax deductions. You may be able to offer stock options and raise money in the future. But C-corps are expensive to start, face double taxation and are subject to more regulations.
An S-corporation is a pass-through structure, meaning that it is taxed similarly to a sole proprietorship or partnership. Like a C-corp, owners do not have personal liability. But there are strict regulations and corporate formalities, plus limitations on issuing stocks.
Limited liability company
LLCs essentially take benefits of all business types. If you open an LLC, you get liability protection with the same freedom of a sole proprietorship or partnership. You can opt to have your LLC taxed as either a corporation or pass-through entity.