Which Business Structure Is Best for You?
Want to know which business structure is the best for you? You’ve come to the right place.
Taking the leap into starting your own business can be…well…scary.
Intimidating.
Nerve-wracking.
All of the above.
I remember battling the, “Am I even good enough to do this?” negative voices in my head.
Along with the, “Is this really what I want to do?” and “Will I even like being an entrepreneur?” questions because, you know, our mind clings to the comfortable and avoids anything unknown.
We’re a species of survival, you know.
But it can also be exhilarating and rewarding and challenging in the best way possible.
I feel so connected to my clients now that their wins are my wins and their struggles my struggles. I choose to tackle problems right alongside them, and when a solution is found or the light bulb clicks or someone has their most profitable month EVER….girl.
It makes my heart a-flutter.
So while, yes, taking that tiny idea nestling in your head can be frightening, it is OH SO worth it.
And it’s why I want to bust down any lingering barriers you may have between your life now and your dream.
This 4-part blog series is designed to answer all those questions that come up as a new business owner trying to get their ducks in a row. And first up is determining which business type to form your business under.
So if you’re new into your business or still determining if you want to make the leap (do it!), the next few minutes are going to be gold for you.
Let’s get to it.
WHICH BUSINESS TYPE IS BEST?
As a new business owner, you are more than likely going to start out as either a sole proprietor or LLC and then move along the ladder as you grow (although you definitely don’t have to nor do you want to in some instances - but the flexibility to change as your business changes is there!).
Here’s your breakdown of each to help you determine which is best for you.
SOLE PROPRIETOR
This is the easiest form of business structure to be in because you don’t have to file anything to register with the state. Zero. Nada. Nilch.
You simply bring in income, pay out expenses, and file taxes all under your given name. You don’t even need to file a separate tax return – it will just go on Schedule C of your individual tax return at year end.
The downside? You have no legal protection if someone were to sue.
That means that if your customer gets pissed you didn’t get work completed on time, which caused them to lose a big client, they could take everything you own, both business & personal. Including your home. And car. And personal checking account.
Thus, operating as a sole proprietor is a great place to start if you have few assets (business or personal) or are just starting. But as you grow, you’ll want to move on to one of the following.
LIMITED LIABILITY COMPANY (LLC)
Most individuals register as an LLC fairly soon into their business for one reason: protection.
Operating your business as an LLC means that if that same client sued you, they could only go after your business assets, not your personal ones.
There is a fee to register as an LLC with your state, but it’s fairly inexpensive (for instance, here in Indiana, it’s less than $100). And if you’re the only one running the show (& the sole investor), you can still just run your income & expenses through your individual tax return, so you won’t have to pay for a separate business return.
PARTNERSHIP
Starting your business with a partner in tow? Then forming a partnership would be a great starting point. This biz structure also protects your liability in the same way that an LLC does, limiting your liability to your business assets.
However, you do have to file a separate return when structured as a partnership. The income is still pass-through, though, meaning you will pay the taxes on any profit on your individual tax return, not through the company.
So if you make $20,000 and you & your partner split the profits evenly, you both will claim $10,000 on your individual returns at the end of the year.
Insider tip? You can operate as a partnership under the LLC umbrella. So whether you start out with a partner or bring one on later, the LLC structure will be fluid handling those changes.
Insider tip #2? Get an airtight agreement in place – how much profit gets allocated to each of you for taxes, how much you can contribute or receive in distributions, if the company pays for each partner’s taxes, if someone is getting a salary, if someone passes away or decides to leave the business…even if you think it would never happen, it could. I’ve seen it in play, and girl, things can get MESSY.
S CORPORATION
One reason you’d want to move to an S-Corp: If you earn a hefty profit and are paying yourself accordingly, then you could get some serious tax savings.
With any of the previous business structures, you would have to pay self-employment taxes on any amounts you pay yourself through the business. But with an S-Corp, you only pay those taxes on the wages you pay yourself via payroll from the business (which, by the way, IS required for S Corporations).
What does that mean?
Well, if you paid yourself $100,000, as an LLC, you’d have to pay $15,000 in SE taxes. As an S Corp, if you took a $50,000 salary and the rest as regular old owner’s distributions, you’d have to pay $7,500.
Hello, trip to the Maldives.
There are a few more stipulations with an S-Corp, so it’s not all rainbows and butterflies, but in my opinion, in the right scenario (like the one above), it’s worth it. Always consult a CPA before moving in this direction!
P.S. This is a pass-through entity as well, meaning you’ll pay taxes on your individual return, not through the company. And just like a partnership, you can actually be an LLC and choose to be taxed like an S Corp. Weird but wonderful, huh?
C CORPORATION
The real benefits to a C Corp are that the company operates independently of its owners and can raise money much easier by the issuance of stocks. However, it’s got one big drawback: Double taxation.
C Corps are not pass-through entities, meaning they do pay taxes on anything they earn. If they do pay out money to shareholders (which would be you), they are deemed dividends, and you have to pay taxes on your individual income tax return on those as well.
Yikes.
This is why most small businesses (especially new ones) shy away from this structure. Taxed once is enough. Taxed twice is just kicking me while I’m down.
Stay tuned for the next blog in the series, everyone’s favorite cousin who always seems to knock on their door just when they thought they got rid of them: TAXES.
They may be the bane of every entrepreneur’s existence, but there are some key knowledge nuggets for you to keep in your back pocket in order to keep the IRS at bay AND save money.
