What to Consider When Choosing Your Business Structure
Your business structure determines a few important things about your company’s legal standing and your own relationship to its liabilities. That’s why it is so important to think carefully when you are planning to establish your business. Once you elect for a certain structure, changing it can be very difficult. Your choices will determine everything from your tax liabilities and payment structure to your personal legal liability for decisions made by the company, so choose carefully.
Sole proprietorships are flexible and useful because they simplify your tax obligations by allowing you to pay your business taxes through a Schedule C form on your personal income tax return. You’ll want to plan to pay your business taxes quarterly with estimated payment vouchers if you want to avoid paying interest on taxes owed, but it’s not difficult. Opting for this structure is great for freelancers and others who will not have employees because you won’t need an EIN unless you’re going to hire people and offer benefits.
LLCs offer you options, and depending on how they are set up, they can be taxed like sole proprietorships or like corporations. You can file a form to elect for corporate taxation when you establish them. In most places, LLCs are assumed by default to be partnerships, but sole owner LLCs are common, they just aren’t the assumed default.
You might also consider a conventional partnership structure instead of an LLC. In a conventional partnership, each partner is individually responsible for their own taxes on profits, but the business does need to track income and prepare documents to establish the company’s overall tax burden and to notify the partners of their obligations.
Last but definitely not least, you could establish your business as either an S-Corp or a C-Corp corporation. These options can be more costly than a simple LLC or sole proprietorship, but they offer some tax flexibility that makes them ideal for certain kinds of businesses. Typically, entrepreneurs do not opt for this structure as a new business start-up, but it’s not unheard of.
Finding the right business structure means being able to hire your people and get them to work faster. In general, most entrepreneurs do well with LLCs when they are hiring employees or offering benefits to partners as employees, but there are strong reasons to opt for sole proprietorship or partnership formats for the right business models. If you’re wondering which one would be a good fit for you, review the landscape in your industry and see what structures are most common.