Common business structures, get familiar!
I’m hearing you want to start a business, or are thinking of starting one. You have all these great ideas and are overwhelmed with where to even start - sounds like you? You’re not alone. There are plenty of resources that you can self-guide and learn from, and there are actual business consultants that will help you from start to finish. I always recommend combining both, so that you are learning how to become a smarter entrepreneur on your own and through others. You can always revisit my blogs as an additional resource, too!
I found through a lot of conversations with clients and people who reach out to me to share their business plans and ideas, aren’t familiar with the common business structures. For the purpose of this blog, I want to share the common business structures that you can quickly familiarize yourself with, so you can be smarter when you finish reading.
Most of my knowledge comes from my own noggin’ from my college days learning about corporate finance plus real-life experience through an early career in finance before I made the leap into the Marketing world, and small business clients throughout the last few years. Oh, I can’t forget the knowledge sharing I seek through my network of finance professionals, too.
The business structure you select heavily influences your everyday operations, your tax obligations, and your personal assets. It’s crucial to select a business structure that makes sense for your business, and YOU. You need to find the structure that best balances out your legal protection, risks, and even benefits. You can also combine business structures, I found that not too many people realize you can do this.
Here are the 4 common business structures:
Kind of sounds like what it says , sole ownership, meaning you have complete control over your business, and are the ONLY OWNER. You are not protected from personal liabilities, and you are responsible for personal taxes.
The simplest business structure to start since you are considered a sole proprietorship if you are conducting business in any way but did not register as any other structure.
In my opinion, this structure is ideal for low-risk businesses that don’t foresee a high possibility of being sued for the line of business they are conducting. Also, this structure makes sense if you are just in the early stages and testing out your business.
This structure is for two people or more people owning and conducting business together. Depending on the partnership type below, owners will be responsible for personal taxes and possibly self-employment taxes plus personal liabilities.
Limited Partnership (LP)
Limited Liability Partnerships (LLP)
Limited Liability Corporation (LLC)
An LLC is attractive business structure for many business owners because it allows for multiple owners and owners are protected from their personal assets (savings, house, investments, etc.)being included in bankruptcy or lawsuits. Also, having LLC at the end of a business name makes it look official, so many people select this for that reason, too.
LLCs are responsible to paying self-employment tax, and personal or corporate taxes.
A corporation is a legal entity that is separate from its owners (shareholders), meaning the owners are not personally liable when a corporation is formed, but a corporation acts like a person, or a legal person. This means the corporation can raise funds, apply for credit, hire employees, pay taxes, sue or even be sued.
There are different types of corporations, each with its own criteria to form and tax responsibilities. Some corporations are also double taxed: on the profits and again when the dividends are paid to shareholders on their personal tax returns.
A corporation is more costly to form than the other business structures for obvious reasons.
My rule of thumb for anyone starting a business is to think of the risks involved that could potentially clean you of your personal assets. For example, if you are a food business, you are dealing with potential food poisoning, people’s allergies, etc., that is med-high risk to me, and you should consider an LLC at the least.
If you want to continue learning and reading more about starting your own business, I highly suggest you go to www.sba.gov because this site has all the resources you need, you just need to put in the effort to self-learn and read. I always recommend finding someone who is familiar with the industry you are targeting, or someone who you can consult with on making sure the i’s are dotted and t’s are crossed.
For my Massachusetts readers because I live here, I suggest going to
www.mass.gov/topics/business-resources to learn more about starting a business.