Sole proprietorships are by far the most common for small businesses. They make up 23 million or 73% of all small businesses in the United States.
When you start a small business, you need to choose a business structure for it. A sole proprietorship is one choice, but it’s not the only one.
The choice you make impacts how you’re taxed and there are legal consequences to consider. Choosing a business structure is one of the most important decisions you’ll make.
Read on to learn the considerations when choosing a business structure and how to choose the right one.
Know the Business Structure Types
Why do so many people choose to be sole proprietors? It’s the easiest business structure to set up. It’s the cheapest one to set up, too.
Business owners don’t realize that they don’t have asset protection that other business structures do. The tax authorities and the legal system see a person and their business as one and the same.
You end up paying more in taxes because of the self-employment tax, and you could lose your personal assets if you get sued or face financial issues in your business.
An LLC lets business owners separate themselves from the business. You can have single-member LLCs or multi-member LLCs.
Partnerships allow multiple people to own a business as well. In this instance, there’s a general partner and other partners in the organization.
The general partner is very similar to a sole proprietor. They don’t have a legal separation between their personal assets. They also pay their business taxes on their personal tax returns and pay self-employment taxes.
Corporations give another level of legal protections and separation between business owners and the business. There are many benefits of a corporation.
The main benefit is that you could pay lower taxes, depending on the corporation you choose. You can become an S-Corp, C-Corp, or B-Corp.
Choose a Business Structure
Choosing a business structure becomes much clearer once you know the business structure types and the advantages of each.
You need to assess your business. If you’re a self-employed person, you could be a sole proprietor, single-member LLC, or S-Corp.
If you plan to seek outside investment in your business, you might choose to become a C-Corp. That allows you to have as many shares and shareholders in your business.
For two or more people, you can choose a partnership, LLC, or corporation.
You need to assess your estimated business income, level of risk, and your business plans. It’s wise to seek help from a CPA and business attorney as you make your decision.
A Guide for Choosing a Business Structure
One of the most important decisions you’ll make in your business is when you choose a business structure. You have to know what the business structures types are.
Learn the tax and legal consequences of each one. Look at your business and decide which one is right for you. You should always get professional advice before you decide.
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