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How to choose the right structure for your business

Posted by Grace Townsley

August 5, 2021    |     4-minute read (702 words)

Deciding on the structure of your new business is certainly not one of the most exciting tasks for an entrepreneur. But considering how the structure of your business will deeply impact your business’s function, expenses, reports and paperwork, it should be one of the first few questions you answer -- before you go buy a web domain and order your business cards. 

If you’re starting your business alone and you don’t need liability protection:

A sole proprietorship is the simplest business structure and one of the most common structures in the US. If you want to become an independent contractor, like a landscaper, writer or tutor, a sole proprietorship may be the right structure for you because it does not generally require paperwork or separation of your business and personal finances. 

As a sole proprietor, you are personally responsible for all business debt you incur. You are not separate from your business, so any debts, legal action and tax liability that come upon your business are your sole responsibility.  

Sole proprietors can register their business name with an assumed business name form found at your county office. This reserves the business name in your county so it can’t be taken by another nearby business. 

For low-risk businesses or entrepreneurs who want to “test drive” their idea before taking it further, a sole proprietorship may be a great starting point. 

If you do want liability protection:

A limited liability company has one or more owners. They are protected from liability because the LLC is considered a separate business entity. While this structure does require more paperwork– registering the LLC through your state, creating an operating agreement and paying the appropriate fees -- it does offer the advantage of operating separately from the personal finances of the business owners. 

Similarly, a limited liability partnership can be formed when two or more partners go into business together. A limited level of personal liability protection is offered with this structure. It should also be noted, not every state allows for the LLP structure. Common examples of LLPs include businesses where licenses are required, like doctor’s offices, law firms and accounting firms.

Both LLC and LLP business structures allow for some level of personal liability protection, but the protection offered by the LLC structure is stronger. Also, both structures offer the option of pass-through taxation, where business income is taxed like each members’ personal income. 

Corporations

The most complex business structures are S corporations, C corporations, and B corporations. Each type offers stronger personal liability protection than LLCs and LLPs, allows for the sale of shares to raise funding, and can continue doing business, uninterrupted, if a shareholder leaves the corporation.

Taxation for corporations can be complicated and generally requires the use of a Certified Public Accountant at tax time to make sure the proper forms are submitted. B and C corps are taxed directly, as though they are a person. Each owner’s income from the corporation is also taxed at their income tax rate, creating “double taxation.” For this reason, many business owners avoid structuring as a corporation until the company is big enough that the benefits outweigh the higher taxes. 

Other special cases

For businesses created to benefit the public through charity, education, or other forms of public service, the nonprofit corporation structure was created. In some cases, these businesses are exempt from paying taxes as long as they continue to meet nonprofit corporation requirements and file proper documentation. 

Occasionally, a business may be structured as a cooperative. These kinds of businesses are owned by their members, with members either buying shares of stocks or purchasing the co-op’s product or service. Examples of co-ops include credit unions, some insurance companies and utility companies.  

Key takeaway

Before starting your business, you may want to meet with a business lawyer or a CPA to talk about your specific needs. Once you’ve chosen your structure, a business lawyer can help you complete the required paperwork to have your business properly recognized and protected.

While this process can be tedious, structuring your business correctly from the beginning can save you a lot of headaches (and potentially, income) in the long run. 

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