A good business idea is only the first step towards a successful enterprise. Before moving forward, it is wise to find the right business structure to help that idea thrive. Entrepreneurs looking to start their own business can narrow down their search by asking these three questions:
#1: What kind of liability am I comfortable with?
Business leaders will point out that one of the biggest benefits of most business structures is protection from liability. Sole proprietorships and partnerships do not have some form of liability protection while limited liability companies (LLCs) and corporations both have provide this type of protection.
This is important if you and your business partners want to keep personal finances separate from business finances. If something happens and a creditor goes after your business, the LLC or corporation will take the financial blow — not your personal bank account.
#2: How do I want to handle taxes?
Those who run a sole proprietorship or partnership generally account for the business’ taxes on their own, personal tax returns. The Internal Revenue Service (IRS) refers to this process as “pass through” taxation because the business’ taxes basically go through the owners. The LLC also has pass through taxation while a corporation is its own separate entity with its own separate tax returns.
#3: What about paperwork?
One of the main benefits of the sole proprietorship, and likely the reason for its popularity amongst business owners, is the fact that it is the easiest business structure to form and has the least paperwork. The United States Small Business Administration (SBA) automatically considers business owner who run a business a sole unless they register as something else.
This is beneficial for those in the early stages who want to test out their business ideas, but, due to its lack of liability protections, the SBA cautions against use for anything but low-risk enterprises. In contrast, the other forms of business structure will require some paperwork at the start-up and some, like corporations, also have additional annual paperwork requirements.
The bottom line.
In the end, it is important to take these questions as well as your future business plans into consideration before choosing a business entity. With guidance, you can better ensure you choose the right structure for your business needs.