What Business Structure is Best for You?

Let’s talk about business structure. A lot of people try to keep their business “under the radar” of the government. Most people who do so do it with the best of intentions at heart. However, some decisions, like not taking the time to get required licenses or choosing not to file your taxes, are huge business mistakes.

When you try to hide your business from the government, you won’t be able to grow your business very much. You’ll be making decisions that will keep you “secret” from the authorities, but, in doing so, it will also keep your business very small. If you want to be profitable and grow, you must operate aboveboard.

First, choose a business structure that meets the unique needs of your business. Then, as you do business, be open, honest, and pay your taxes. Nobody likes taxes, but it’s part and parcel of being a business owner. Trust me, if you try to fight the IRS, the IRS will always win. So you might as well obey the laws of the land, and do it right the first time. After all, the Bible does instruct believers in this way: Give back to Caesar what is Caesar’s and to God what is God’s. (Matthew 22:21)

Today we’re going to take a brief look at business structure options. Different states have different laws, so be sure to check with a business attorney once you have an idea about how you’d like to proceed.

Sole Proprietorship

The simplest form of doing business is the sole proprietorship. This is a fancy way of saying you’re in business by yourself, for yourself. It takes very little to start a sole proprietorship. Decide on a Monday that you want to open a business, and on Tuesday you are in business. You file your taxes in your own name, usually with your Social Security number. You’ll pay quarterly or yearly, depending on state regulations and your personal financial situation. You alone hold decision-making power as the owner and operator of your business, and you’re the one responsible for accurately filing taxes.

While it may be the simplest way of operating, it can also be the most risky business structure. Sole proprietorships are subject to unlimited liability. This means you are 100% liable for all of your debts. Those debts can extend from your business into your personal life, including your house and car. If you make a few critical mistakes, you could end up being sued and losing your own home for something related to your business.

Partnerships

A partnership is a business structure in which two or more individuals open and operate a for-profit business together as co-owners. Legally, the business is regarded as a group of individuals working together. However, each partner in this business structure must file their share of the profits on their individual tax returns.

Partnerships enjoy nice perks like having shared start-up costs and shared responsibility of work. But be careful. Sometimes partnerships can go bad quickly if all partners are not unified in the vision and direction of the business. Partnerships are often started out of a mutual passion; that passion can fade when the hard work sets in. Just make sure all parties involved are of like mind as far as the business is concerned.

There are several types of business partnerships: limited partnership, general partnership, joint venture, and strategic alliance. If you think a partnership is the way you want to structure your business, take some time to research exactly which model will fit your needs best.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a business structure similar to a corporation, but on a smaller scale. LLCs are popular with small business owners because in an LLC, you have limited personal liability for the debts and actions of the business. This means personal assets like your home and car are shielded from any bad business debt or potential legal action. Another perk LLCs enjoy: the bottom-line profit of the business is not considered to be earned income to the members, and therefore is not subject to self-employment tax as it is in a sole proprietorship.

Owners of an LLC are called members. Members may include individuals, corporations, even other LLCs. There is no maximum number of members, and some LLCs are operated by a single individual. The definition and operating rules of an LLC can differ slightly from state to state, so it’s important to check your state’s requirements.

Here’s an interesting fact: Each year, the IRS audits 1 out of 3 sole proprietorships. That’s a whopping thirty-three percent. An LLC is audited only 1 out of 100 times – that’s just one percent! Can you see why the LLC is such a popular business structure?

S Corporation or S-corp

An S corporation is a corporation that makes a legal election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.

This means S corporations do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. We call this single taxation.

The S-corp option is primarily used for larger businesses and isn’t usually the first consideration for an off-the-grid business.  Maybe one day, but you’re probably not there yet.

C Corporation or C-corp

A C corporation is a corporation that is legally taxed under Subchapter C of Chapter 1 of the Internal Revenue Code. Most major companies are treated as C corporations for federal income tax purposes. A C Corporation is probably not relevant to your small business, as it is usually reserved for the giant corporations.

Important note: This information should not be construed as legal or tax advice. Always consult a qualified attorney, tax professional, or business consultant regarding your particular situation.

Next time: Tips on outsourcing accounting and tax work.