What Business Type Is For You?
Before starting your business, you need to determine which business structure works best for you. The business type will determine your day-to-day operations, legal protections, and how much you pay in taxes every year. Weigh the pros and cons of each.
Sole Proprietorship
Are you a solo business owner? A sole proprietorship starts when you do any work as a self-employed person. It also means no separate business entity exists. You personally own and operate the business. You personally own the equipment and materials. You personally own the intellectual property and profits. The downside means you also personally take all the liability, legally and financially.
Pros
- Best for freelancers or gig workers
- Small, low-risk businesses can start as a sole proprietorship
Cons
- You are responsible for any debt the business acquires or legal action taken against the business
Partnership
Having more than one owner helps alleviate some of the responsibility while sharing the profits. If you have a partner in your business, you may want to explore filing for a partnership as your business type. It’s similar to a sole proprietorship but made for two or more people to share ownership. With a partnership agreement, the terms of the partnership are outlined to determine how profits and losses are split – all of which need to be reflected on personal tax returns.
Pros
- Great to test out a business idea without diving head first into forming a more formal business (LLC or corporation)
- Financial support among business owners
- Shared workload and responsibility
Cons
- Splits any losses among the other partners, and could potentially lose personal assets
- More than one person to answer to in the business when it comes to profits and losses
Limited Liability (LLC)
A limited liability corporation (LLC) is the simple solution for a larger company. An LLC provides the same legal protections as a corporation while operating on a smaller, simpler scale. For example, every owner’s personal assets are protected like a corporation. However, there are less hoops to jump through. An LLC isn’t required to form a board of directors and hold shareholder meetings. Instead, the owners can manage the business how they see fit like a sole proprietorship or partnership.
Pros
- Personal assets are protected
- In most states, once you file for an LLC, you gain business name exclusivity
Cons
- Costs to set up an LLC are high and could take a toll on starting a new small business
Corporation
Unlike the other business types, a corporation is a legal, separate entity from the business owners. Business owners in a corporation are usually referred instead as shareholders. A corporation can protect itself against any legal or financial liability without it falling on the owners as easily.
Pros
- Transferring ownership is easy through selling stock
- Depending on the corporation type, income distribution can allow your overall income as an owner to be taxed at a different rate
Cons
- It’s a lengthy and pricey application process to get started as a corporation
- Certain legal requirements must be followed to maintain the status as a corporation
Are you ready to explore these business types further? Contact your local financial institution. They may have business services experts who can answer your financial or tax questions in regard to these business structures.