When starting up a new business, you must make all types of decisions, including how you will structure your company. Business formation options include sole proprietorships, partnerships, limited liability companies and corporations. The type of structure you select for your fledgling business may profoundly affect everything from how you operate in the day-to-day to how you pay your taxes.
Due to the impact that your business structure may have on your operations and growth, you may benefit by considering the various options to ensure you choose the formation type best suited for your needs and goals.
According to the U.S. Small Business Administration, you may operate as a sole proprietorship without taking any formal action. By doing business activities without registering as any other business type, you fall under this formation category. As a sole proprietor, your business does not exist separately from you. Rather, your personal assets and liabilities are tied to those of your company.
If going into business with one other or more people, you may consider establishing a partnership. Through this formation type, your company’s profits and tax obligations may pass through to you and your partners’ personal tax returns.
Alone or with a group of other owners, or members, you may choose to form as a limited liability company. Through an LLC, you may benefit from the advantages of both sole proprietorships and corporations. Like with sole proprietorships, LLCs do not pay corporate taxes. Though, you must pay self-employment taxes. Further, this type of structure type protects you and the other members from personal liability in the event of legal actions or bankruptcy filings.
Unlike the other structure formation types, corporations form as separate entities from those who own them. Therefore, the business itself makes profits and bears responsibility for liabilities and taxes. While a business structured in this way may offer you the greatest level of protection from personal liability in the event of legal action or a bankruptcy, it costs more to form and has more extensive operational requirements.