Keep These 5 Considerations in Mind When Choosing Your Business Structure

The different types of business structure are:

• Sole proprietorship: A business with only one owner/employee. Your business assets and liabilities will not be separate from your personal assets and liabilities.
• General partnership: General partners co-manage the company and take mutual responsibility for its expenses and liabilities. A general partnership may be a good option for companies with multiple owners or professional groups such as attorneys or doctors.
• Limited partnership (LP) or limited liability partnership (LLP): Both LPs and LLPs involve general partners as well as “limited” partners, usually investors, who have no control over the company and assume no personal liability (except where there has been fraud or reckless conduct).
• Corporation: An independent legal entity in which owners are not liable for the corporation’s actions and debt belongs not to the owners but the corporation itself.
• Limited liability company (LLC): A structure in which each owner’s share of the company determines taxes. An LLC protects you from personal liability in most cases (for example, your home or your car would not be at risk if the company faces bankruptcy).
• S corporation: A structure that allows a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership—in essence, dividing the tax burden among the shareholders.
• B corporation: A B corporation, or benefit corporation, is formed to create a public benefit as well as profits for its shareholders. This structure allows a corporation to identify public benefit as a corporate purpose. Under other structures, a corporation cannot consider public benefit in making decisions without risking claims from stockholders worried about the corporation’s bottom line.

Here are five things to keep in mind as you determine your business structure:

Size: If you are the owner and only employee, a sole proprietorship is the most common business structure. It is relatively simple to form and involves less paperwork than the other structures—however, the sole proprietor is personally liable for all expenses incurred by the business.

Liability: How insulated does the owner need to be from legal liability? If the owners can’t afford the personal risk of liability, a sole proprietorship or partnership may not be the way to go.

Shareholders: Do you ultimately want to be able to sell shares in your company? You will need to consider a corporation structure, which will allow you to sell stock. Depending on the number of shareholders, you may be able to form an S corporation.

Risk: Is your business low-risk? If so, you may be comfortable with a sole proprietorship. If not, you may want to consider an LLC or a corporation structure which can help shield you from personal liability.

Taxes: Under a sole proprietorship, a general partnership, an LLC, or an S corporation, taxation is determined by income and loss reported by the owners. Corporations may be subject to a second tax (double taxation) paid by the owners if they receive corporate income in the form of dividends. In a limited partnership or limited liability partnership, the general partner (the one who does not have limited liability) must pay self-employment taxes. In these structures, profits are also passed through to the personal tax returns of the general partners. LLCs do not have to pay unemployment or disability taxes for their owners.