If you’re considering starting a new business, you may not be sure which business structure to choose. There are many different entities that you can choose from, depending on the type of business you’re running and the goals that you have for your new company. They all come with different benefits and drawbacks, so it’s important to consider your unique situation and how each structure may affect the realization of your vision.
The three main business structures that people choose from are sole proprietorships, LLCs and corporations. How are these different and why would you consider each one?
The losses and profits that the corporation makes are owned by that company. The company itself is owned by shareholders. This structure commits the upper management of a business to abide by a very specific board of directors arrangement and to regularly report information about the company to the government. Large, complex businesses are often set up as corporations with multiple branches.
A sole proprietorship, on the other hand, is a business being run by one person. Usually, this business doesn’t have any other owners or employees. It’s just a way for an individual to declare their entrepreneurial efforts as a legal business enterprise. They’re liable for debts that the business incurs, and their tax liability is not independent from that of the company.
An LLC is a limited liability company. The main benefit is that owners are not liable for the debts of the business like they generally are in a sole proprietorship or partnership situation. If the business takes out a loan, the company is responsible for paying it back. If the company were to go bankrupt, the lender couldn’t come after the owner personally to get that money. With something like a sole proprietorship, the owner would be responsible for debts that they had taken on. An LLC can also offer some protection if the business gets sued.
Essentially, these different business structures are going to have a major impact on your financial decisions and your taxes. Be sure that you fully understand all of the different options at your disposal and the legal steps that you will need to take to set up your new business. Seeking legal guidance is a good place to start.