The Truth About Small Business Structures that You Need to Know
Common Small Business Structures
Bolstered by high hopes and great ideas, many new small businesses are started without truly understanding their financial and legal status. As an entrepreneur, there are a variety of ways to structure your new business, such as regular corporations, S corporations, and partnerships. However, the most common structures are Limited Liability Corporations and Sole Proprietorships.
A Sole Proprietorship is most likely the simplest and most popular structure for a startup, but it may not provide entrepreneurs the legal and tax advantage that an LLC does. As a sole proprietor, you will report the net income or loss of the business on your personal income tax. Normally, sole proprietors own part-time or small business without employees.
An LLC, unlike a sole proprietorship, is a hybrid of a partnership and corporate structure which allows protection from liability of a corporation’s and the tax advantages of a partnership. In comparison to a sole proprietorship, an LLC is owned and managed by investors or members. If structured correctly members from an LLC will be taxed directly at their share rate.
The most significant benefit of an LLC versus a sole proprietorship is the owner’s liability is limited to the amount they have invested in the business. So a member is not personally held liable for the debts of the LLC. A sole proprietor is held solely responsible for all debts incurred. Thus putting your home, car, and other personal property at risk for satisfying business debts.
The only way to ensure you are selecting the right structure of your business is by consulting a tax professional and the IRS. For the source of our information and for more please visit the IRS website.
Sole Proprietorship
Advantages
- Easy to setup and establish. Generally can be as easy as setting up a bank account.
- Not required to register for an EIN (employer identification number) if you have no employees.
- There is no state registration required
- If your business is based at home, you may have no start-up costs
- Requires less paperwork and less rigorous record keeping
Disadvantages:
- Sole proprietorship is not a separate entity,
- Owner is responsible for all financial obligations and debts incurred by the business
- This structure provides no protection to owner’s personal assets
Limited Liability Company (LLC)
Advantage
- Owner’s/Member’s assets are protected from financial obligations and business debts accrued by the business
- Tax obligations similar to a sole proprietorship
- Not subject to double taxation or corporate tax obligations
- Requires less paperwork and less rigorous record keeping than a corporation
Disadvantages:
- More expensive than a sole proprietorship
- Slightly harder to set up
It is important to understand the different business structures and find the structure that best fits your business. How your business is legally structured will affect your tax situation and the potential for success more than you may realize; you should always consult with a tax professional for business tax advice!
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