Working out the best way to structure your business might not seem like much of a priority, but this couldn’t be further from the truth.
The only way to choose wisely is to know the differences that separate the main options, so let’s look at these in detail to bring you up to speed.
What is an LLC?
With a limited liability company (LLC), you’re drawing a line between your personal assets and the property that’s associated with your business.
It essentially signifies that the company is a separate legal entity in all cases apart from taxation. So while you won’t be personally liable for paying any debts the company owes, you will need to put down profits you make and losses you accrue on your own tax return.
How to start an LLC
So what do you need to start an LLC? Well, you can file the paperwork yourself, registering a single-member LLC with the authorities in your state.
There are also dedicated service providers that will form an LLC on your behalf, handling all of the administration involved. You could alternatively instruct a business attorney to do the legwork, and achieve much the same result.
Why choose an LLC?
Aside from the aforementioned benefits in terms of taxation and personal liability, forming an LLC is worthwhile because it gives you flexibility in terms of management structure and profit sharing. There’s also less red tape than you’d face with a full-blown corporation to your name.
What is an S-corp?
An S-corp leverages the same liability protections for owners, but with the added prestige and oversight that comes with corporation status. S-corps must have fewer than 100 shareholders, and profits can be paid out to this group, while a board of directors is also a requirement.
IRS rules regarding S-corps ensure that owners aren’t taxed twice on earnings, and it’s more of a tax-related status than a fully fledged structural element, since companies can be S-corps and LLCs simultaneously so long as they meet the requirements.
How to start an S-corp
All shareholders in a business must sign Form 2553 which is then submitted to the IRS for processing, at which point your tax designation will change accordingly.
You’ll have to have created an LLC first, of course, and this could be the natural evolution for your growing company.
Why choose an S-corp?
Growth is usually the motivating factor behind opting for S-corp status, while still enjoying a pass-through tax setup.
Of course it doesn’t have the same flexibility as a standalone LLC, and you’ll need shareholders onboard, as well as the board of directors to tick all the boxes, creating more legal complexities and legwork.
What is sole proprietorship?
Put simply, sole proprietorship describes the state in which an individual is the owner of a business over which they also have direct managerial control.
Unlike an LLC, with a sole proprietorship the legal buck stops with you. So if someone sues your business, or it defaults on any loan it has taken out, the owner is unavoidably liable.
How to start a sole proprietorship
For the most part you won’t need to do anything more than registering the name of your business with the relevant local and national authorities to start a sole proprietorship.
Why choose sole proprietorship?
Because of the minimal amount of bureaucracy involved, a sole proprietorship might be preferred by a small business owner who wants to get their operations off the ground quickly.
There are risks relating to liability, but for those in the early stages of an entrepreneurial endeavor, they could be worth taking.