The idea of starting a business can be exciting, to say the least. However, incorporating the business can be a daunting task. Choosing a business structure that’s perfect for your business is a headache for most small business owners.
Despite the headaches involved, it is vital that you select the right business structure for legal reasons. Your business structure will depend on a number of factors including business deductions, businesses you intend to work with and the growth of the business. Without any further ado, take a look at the different types of business structures.
This type of business structure hosts the largest percentage of business owners. The structure defines an unincorporated business where the owner of the business pays taxes using their personal Social Security number. However, you can get a Taxpayer Identification Number or an Employer Identification Number.
The two eliminate the use of your Social Security Number to pay taxes. If you are unsure of which form to fill, you can use this list of tax schedules.
In addition, as a sole proprietor, the business will operate under your legal name. However, you can opt for a preferred name which identifies your business by applying for one with the Doing Business As. By doing this, the local government and the state is able to identify the name that the business operates under.
Keep in mind that various states have varying DBA registration procedures.
One glaring disadvantage in this arrangement is the lack of legal protection of your assets. This means that the law doesn’t recognize any difference between your business assets and you. Should you end up bankrupt or sued for that matter, then your personal assets could end up in the debtor’s hands.
Limited Liability Company (LLC)
In this type of structure, assets owned by the business partners enjoy legal protection. This means that they cannot be held liable for any liabilities or debts incurred by the business.
Keep in mind mixing personal funds with business activities results in “piercing the corporate well.” In other words, it means you have to operate the business as a detached entity to make sure that you maintain the LLC status.
As a business owner, this is the next step after a sole proprietorship.
Also known as S-Corp, the IRS categorizes this type of business structure as a subchapter S. The latter defines S-Corps as a singular entity separate from its owners.
As such, it means you will enjoy legal protection as is the case in LLCs, which is the separation of personal assets from the business. This also means the profits from your business will be taxed as a separate entity.
The catch is the IRS requires all shareholders working for the company pay themselves industry rate salaries. In addition, shareholders must receive market value dividends.
Failure to that will attract the IRS’s attention who will group any extra earnings from the business as wages. This means the taxes will apply at the shareholder level instead of the corporate level.
Related: S Corp vs. LLC
C-Corp or C Corporation
This arrangement is quite appealing to the knowledgeable and independent professionals. In C-Corps, owners can be shareholders as well. In that regard, both the owners and the businesses form separate entities.
For cases where you are the owner of the C-Corp, you are termed as the majority shareholder. Since the law recognizes the corporation as a separate entity, then the IRS also views it as a taxpayer. This means taxes will apply at corporate level and also taxed when the shareholders receive their dividends.
The C-Corp structure is the most complex of all business structures available, but it is also an appeal to the savvy professionals. It also comes with various advantages including easy to write off expenses, reduced audit risks, and separation of professional and personal assets.
At this point, you know the various types of business structures that exist. You also understand each business structure and which is perfect for you. Therefore, you can use this knowledge to formulate a plan for your business moving forward.
Besides that, if you find this whole structure thing is quite overwhelming, you can seek legal and business advice from industry experts.