Having your own business is an alternative to a nine-to-five job and an attractive one. U.S. small business owners make an annual income of around $70,000 on average.
If you’re interested in becoming one of the millions of small business owners in America, one of the first things you need to decide on is its structure. In this article, we will discuss the common structures as well as the advantages and disadvantages of each one for aspiring entrepreneurs like you.
1. Sole Proprietorship
A sole proprietorship is the easiest structure to register as. The requirements are few and simple compared to others as stated by Chron, which is probably why most small businesses start off as one.
When you register as a sole proprietorship, you are considered self-employed. And since your business is essentially just you, you get almost everything you earn after paying taxes.
The most significant drawback to a sole proprietorship is the unlimited liability and lack of protection for your personal assets.
Since your business does not become a separate legal entity from you, you have the primary responsibility to answer to your creditors. This is an important consideration as creditors can come after your hard-earned income, and at times, even your properties and equipment.
A partnership is a business operation between two or more individuals. It’s still easier to form than an LLC and a corporation and advantageous in the sense that partners can work together in building capital and running the business.
Aside from management, partners also share among themselves the profits of the business.
Like a sole proprietorship, however, a partnership also does not become a separate legal entity from its owners. Depending on the initial agreement made, one or more partners will have to shoulder the business’s liabilities. A partnership is also dependent on a trusting relationship between partners.
This is because any partner can act on behalf of the partnership and may make decisions that can greatly affect the business.
3. Limited Liability Company
A limited liability company (LLC) is a hybrid structure that renders your business a separate legal entity from you. This gives you protection against the possible legal and financial liabilities of your business. An LLC also has various advantages, including the flexibility of choosing how you’ll operate and be taxed.
Yet, an LLC has relatively more steps to form though compared to a sole proprietorship and a partnership. ZenBusiness explains that there are five common steps to forming an LLC.
These are choosing a name for your business, appointing a registered agent to represent your business, filing the Certificate of Formation/Articles of Organization, creating an Operating Agreement, applying for an EIN if you have employees, and reviewing tax requirements.
If you’re willing to take these extra steps, in the beginning, to protect yourself as an entrepreneur, then an LLC is an attractive option for your business structure.
A corporation is created when it is incorporated by a group of shareholders who have ownership of the corporation through shares of stock. Similar to an LLC, it offers protection for the personal assets of its members because it becomes its own legal entity.
However, a corporation is more difficult to form and maintain. The Legal Information Institute states that corporations require you to choose a board of directors, determine the number of shares in the corporation, and write bylaws that show how the corporation will be run. Corporations are also subject to double-taxation. For entrepreneurs who are just starting out, this process can be more of a challenge energy and resource-wise.
Your business structure will determine the number of things for your business: from something as basic as the business’s name to the way it will operate, be taxed, and the fees and expenses you’ll encounter.
This may be tricky at first, but it will give you financial freedom if you do it right from the start. All in all, you need to study the features of each business structure and think about what works best for you, your operations, and business stakeholders.
Choosing well will contribute to the financial growth and overall success of your business in the long run.