When you’re an entrepreneur with a great idea, you’re thinking about your dreams and your goals — not your business structure. Unfortunately, the day-to-day realities of business will quickly become important, so picking the right business structure early on can be critical to your success.
The most common five types of structures are sole proprietorships, partnerships, corporations, limited liability companies (LLCs) and S corporations. There are pros and cons associated with each of them.
How do different business structures compare?
A sole proprietorship is the easiest business structure to set up. It requires little or no paperwork and gives the owner complete control over its operations. However, the major drawback is that it intertwines the owner’s personal and business finances. This leaves the business owner completely liable for all of the business’ activities.
Partnerships are similar to sole proprietorships, with the exception that they have more than one business owner. Like a sole proprietorship, each partner is personally liable for all debts the business may owe.
If a person is concerned about keeping their personal and business assets separate, then a corporation makes a lot of sense. This will also allow an owner to accept money from investors as well as issue shares, which can make raising capital and expansion easier.
An LLC will allow an owner to keep their personal and business assets separate. There are both S and C corporations. An S corporation has a “pass-through” structure. Meaning, state and federal revenue authorities only tax net profits at the shareholder level.
What steps do you need to take to pick your business structure?
Choosing the right structure for your business isn’t something you should do without some experienced legal guidance. Learning more about the pros and cons of each option as it applies to your business can help you make an informed decision.