New entrepreneurs often do not realize the importance of selecting the proper business structure for their companies. They assume that all structures are basically the same and that it comes down to one or more small differences that are really not relevant to their business goals or success. This is inaccurate and in fact picking the wrong business structure can inhibit your success, leave you open to critical liability issues, and cause you a lot of extra money and work.
There are a range of business structure options for-profit companies looking to set up in the United States. They range from sole proprietorships to corporation structures that mimic the country’s largest corporations. Each has benefits and liabilities that need to be carefully thought through in order to make the right choice for your business.
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A sole proprietorship is a very simple business structure that many consider when forming their companies. It is fastest setup and does not require many of the typical business documents in order to set up. The business structure offers great flexibility of management, fewer legal controls, and fewer taxes. However, the business owner is personally liable for all debts incurred by the business. It also does not contain the critical structure and foundations needed when your business begins to grow.
S Corporations and Corporations
At the other end of the spectrum are S corporations and C corporations. These very formal structures provide the highest level of liability protection and also position you ideally for growth. However both structures require you to make separate tax filings which can be a major expense throughout the year and doing tax time. They can also limit your ability to manage your company because they each position a board of directors as the ultimate control of the company. If you are a strong minded leader, having a group overseeing all of your decisions can be very limiting and can potentially negatively impact your business.
Limited Liability Company (LLC)
The middle ground for these two structures is a limited liability company. An LLC offers much of the simplicity of a sole proprietorship, yet has much more structure and can accommodate the growth of your company to nearly any size. It also allows you to control your business with no oversight from a board of directors or even partners unless you choose. The business is managed by the owner via an operating agreement signed by the partners and it has much simpler business and tax filing requirements then either an S corporation or C corporation. Finally, it is simple to form LLC online. For these reasons setting up your business as a limited liability company is often the best choice.
New entrepreneurs should do their homework to understand which business structure is ideal for their business. Each has merits that need to be considered, but in the end, the best choice will often be a limited liability company.