By: Rhett Buttle
As a business owner, there is lots of information that you’ll need to determine how to structure your business, and a lot you’ll learn along the way. For example, the business structure you start with may not be the one you have two or five years from now as your business evolves.
For now, it is important to decide which structure makes sense for you and your business idea. Your business structure determines which set of rules and taxes will apply to your business. Broadly, there are four types of business structures.
Sole Proprietorship: A sole proprietorship is the default business structure. In other words, all businesses are sole proprietorships until they indicate otherwise. With a sole proprietorship, you are the sole owner of the business assets and liabilities, which means there is no separation from the business entity and you as a person. The downside is that you can be held liable for debts and contracts of the business.
Partnership: If you are starting a business with one or more partners, then you have a partnership. Business partners add to the business and receive profits from the business. A partnership is similar to a sole proprietorship, but it just includes more than one person. Most states require the partners to sign some sort of partnership agreement to outline how profits are shared and how liability is distributed.
Limited Liability Company (LLC): LLCs create a separate legal business entity that protects the business owner from personal liability, thus protecting your personal assets. Each state has different rules and regulations relating to LLCs, so be sure to evaluate state-by-state rules. The administrative burden to forming an LLC is higher than a sole proprietorship, but you as the business owner receive more personal protection. As an LLC, you have different tax liabilities than as a sole proprietorship.
Corporation: Corporations are the most complex business structure and are how most large companies are structured. This type of structure will provide you with the most protection, but it requires substantial paperwork and administrative work. It is intended for large well-established businesses that need substantial liability protection.
A sound approach is consulting with an attorney about which structure makes sense for your business and what local rules and regulations you should be aware of and follow. Similarly, talking with an accountant to better understand your local, state, and federal liability requirements could also be helpful. The U.S. Small Business Administration also has an excellent resource center to help you determine which structure may be best for you.
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