Choo choose a business structure
Choosing a business structure deserves some real time and careful consideration. Your business structure shapes everything on the financial and tax side- from the amount of risk you are assuming to how you keep your books to how you pay taxes. Like everything in life, there are strengths and weaknesses to each option and which you choose will depend heavily on several factors that are worth a discussion with your tax professional.
A sole proprietorship is the simplest business to set up. It’s the default for a business owned by one person, and is often chosen by freelancers, people with a side-gig, and brand-new small business owners because it doesn’t require any formal registration to start and keeps complete control with the owner. If you want to start quickly, keep your costs low and have straightforward bookkeeping this might be the set-up for you. The main pitfall is that you as the owner and the business are the same, meaning you are personally liable for everything.
A Limited Liability Company (LLC) is another popular choice for small businesses. It is a business entity you set up at the state level and provides some liability protection without having a lot of administrative burden. As long as you keep your bookkeeping clean, and stay on top of your own state requirements, this can be a great set-up. An LLC trips up some business owners however because it doesn’t speak to how your business is going to be taxed. You still need to decide if you will be taxed as a sole proprietor, choose the S-Corporation status, or become a partnership if you are sharing ownership with more than one person. Talk to a tax pro about your tax options, because choosing the wrong fit can be an expensive mistake.
An S-Corporation is a good choice for small business owners who want to reduce self-employment taxes once the business has become profitable. The big advantage here is the ability to have part of your profits “pass through” the business as distributions without being subject to Self-Employment Taxes. There are strict compliance requirements under this election- payroll must be run correctly, reasonable compensation must be documented and mistakes can jeopardize the S-Corp election. Some states don’t recognize S-Corps and the additional state taxes reduce the overall savings.
A Partnership is a natural fit when two or more people want to go into business together and share profits, responsibilities and decision making. Partnerships are easy to form (it’s the default if your LLC has two or more members). They allow for flexible profit sharing arrangements and have no corporate level taxation. A strong partnership agreement is an absolute must, since one of the major drawbacks is that in a general partnership, each partner can be personally liable for the actions and debts of the other partners.
With any business structure, we can help you understand the ins and outs as it applies to your business and keep you chugging along the path to profits and success!
