As a small business owner, the way you structure your business is one of the most important decisions you will make.
This not only affects liability but also determines how much you pay in taxes. The most common business structures are:
1. The sole proprietorship – Most of our nation’s small businesses are sole
proprietorships—the simplest structure. One person is responsible for all revenue and debts.
2. The partnership – Partnerships are easily formed by two or more people, but the owners are personally liable for all financial obligations of the company.
3. The corporation – This is a legal entity created to conduct business. The corporation shields the owner from personal liability, but there are many more regulations, more costs, and much more paperwork involved in running a corporation.
4. The limited liability company (LLC) and S corporation – These structures are hybrids
that take advantage of the sole proprietorship and the corporation. There are tax benefits
because the company’s income flows through to the owner.
For most people starting a business, it is clear how they want that entity structured. However, it is always best to seek the advice of a tax professional and an attorney. While the process is much easier and less costly upfront with a sole proprietorship or a partnership, liability and taxes could put the owner(s) at risk. There are many stories of freelance professionals who, for whatever reason, get sued by a current or former client and are not only put out of business but also lose significant personal assets because they were not under the protection of a corporation.