How do I choose the right structure for my business?

Decisions, decisions. Once you’ve chosen to earn your livelihood by going it alone, you’ll need to decide on a structure for your business. Your choice will drive what paperwork needs to be filed, how you’ll pay taxes, and who is liable for company losses. I’m not an attorney or tax accountant, so I can only provide a simple introduction to each of the three main types of business entities. You can find greater detail on the numerous website articles. You might want to turn to the SCORE post, Business Structure: Which Works Best for You. SCORE is a nonprofit with business owners who stand ready to mentor novice or would-be business owners through the process of opening their doors to the world.

The SCORE article, as well as many others posted on the internet, offers far more information than I’ve provided here. A sole proprietorship can usually be set up quickly and easily. For other business types, you may want to meet with a SCORE mentor or an attorney to help you decide a suitable structure.

So just what are the major business types?

  • Sole Proprietorship. As you’d guess, or maybe know at this point in your own business journey, a sole proprietorship, with you as sole owner and operator, can be easy and cheap to start. Technically speaking, in a sole proprietorship, you and your business are one and the same. As sole proprietor of my business, I’ve simply chosen to use the name “Cassie Journigan, Writer.” Should you choose to use a name other than your own, you need to file an advertisement – a classified works – DBA, or “doing business as … “ in a local newspaper.

Fees may apply when setting up your DBA. They vary from city, county, or state government, as do the requirements for using a business name other than your own. Your local or state government clerk’s office should be able to tell you if you need a DBA.

According to the SCORE article, all it takes to begin a sole proprietorship is  to sell something, whether it be a product or a service, and there you are, sole proprietor of your business. Outside of rent and utilities, and any staff salaries, setting up costs normally begin and end with obtaining the required business licenses – state, county, and/or city, depending on where you live. No filing fees are necessary. Of course, once you start collecting service fees or product dollars, you’ll need to keep track of the money you bring in so you can file your taxes. Speaking of taxes, you can file by simply adding your business earnings to your 1040. As to finances and other legalities, you hold sole responsibility for meeting all your business obligations.

  • A partnership is unincorporated and includes two or more people who share in the profits or losses of their company. Every partner contributes to the company, whether capital, materials, labor, or other expenses. Each person also holds some responsibility for the company's financial and legal commitments. There are two major types of partnerships:

A limited partnership takes away some of the sting of financial losses for most partners by requiring that each partner be liable only up to the amount he or she has contributed. A big but major difference between the partners is that one is a general partner and the others are normally silent – that is, they are not involved in daily operations. This business type is often used by people who borrow money from others. As the general partner, you may be personally responsible for all debts and obligations of the business. The limited partner doesn’t hold that responsibility.

A limited liability company (LLC) combine features found in partnerships and corporations. Limited liability companies are usually easier and cheaper to set up than corporations and offer greater legal and financial protection for its partners than the traditional sole proprietorship. The owners are not personally liable for their business debts or liabilities, so if you run into legal and/or financial problems, your personal assets will not be seized. Also, where corporations require lots of structure, legalities, and detailed tax reporting, LLCs do not.

  • Legally speaking, corporations are just like a person in that they are entities unto themselves. Businesses so set have the advantage of removing individual liability because they are considered separate from individual shareholders. The corporation itself is considered to carry out business activities; it earns income or incurs losses, pays taxes, and doles out profits to shareholders. There are several types of corporations including C, S, or B corps, close corporations, and nonprofits. A great breakdown on the differences between these types can be found on the Small Business Administration website.

Still have no idea of where to turn when choosing your business structure?

There’s an interesting article on the Inc. website, 10 Questions to Ask Yourself Before Choosing a Business, that might be useful in helping you decide how to structure your business.

If you’re so inclined (and have all afternoon to read through myriad federal rules and regulations), you can see how you’ll fit your chosen structure with tax requirements on the Internal Revenue Service website.

Choosing how you’ll set up your business is probably among the most important decisions you can make, especially in your company’s early life. With the possible exception of starting a sole proprietorship, should you choose between the other types, you would be well served to research, research, research. And don’t forget – the nonprofit SCORE has volunteer business people who will help you set up your own small business.

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