Choosing the Right Business Structure 2022

By: First Union

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Choosing the Right Business Structure 2022

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To choose the right business structure for your company, you must first take into account a multitude of factors. Everything from how you want to be taxed, to how day to day operations might be dependent on structure, to the best way to protect yourself and your assets. Additionally, the business structure will influence how you can raise money to fund your company as well as the type of paperwork and documentation that will need to be filed at both federal and state levels.

You don't want to rush into a decision regarding the structure of your small business. Certainly, you could change down the road, but having a clear picture in your mind as far as how a given structure will ultimately influence the course of your business endeavor is pretty important. To better grasp the various structures and get a feel for what each entails and how consequently they could impact your company, you might even enlist the services of a business attorney to walk you through the process. Below we review the more common business structures to provide a general overview of each.

Sole proprietorship

The easiest entity to start, a sole proprietorship is not separate from you personally. If you engage in business activity but do not take steps to register your business with the state or file any paperwork to that end, then you are considered a sole proprietor.

Now, with this type of structure, your assets, and business assets, as noted, are not separate. The same goes for liabilities and debts. So this means then that if the business incurs legal trouble, you can be held liable. Additionally, they can and likely will go after your assets to recoup a loss and subsequently pay back any outstanding debt.

When first starting, this may be an option that you wish to explore. Again, it's inexpensive to establish; you can acquire a DBA and operate as such, and it might be a great way to "test the waters." However, as you grow—especially if you want to raise money by selling shares—then you will probably want to consider transitioning to another business structure.

Partnership

With a partnership, there are two ways you can go: limited partnerships (LP/) and limited liability partnerships (LLP/).

In terms of a limited partnership, one of the partners will assume unlimited liability while any others will only have limited liability. Per a partnership agreement, those who do have less liability also usually have less control as far as the day to day operations of the business. The profits and losses, much as in a sole proprietorship, are simply passed through personal taxes. The unlimited liability partner will have to pay the self-employment tax.

Limited liability partnerships are structured very much the same except that in this case, every owner has limited liability. With an LLP, all partners/owners are protected against debts/liabilities incurred by the company.

Limited liability company (LLC/)

An LLC is another structure that will help to protect an owner against the company's liabilities. Should legal action be brought against the organization, your assets are generally safe. As with a partnership, profits pass through personal returns and so you are not burdened with corporate taxes.

If your business does have an element of risk involved, if you have assets you know you need to protect, and if you're thinking it might be smarter from a tax perspective as you are not faced with corporate tax rates, then perhaps this is a good option for your company.

Corporations

C Corp

Under the umbrella of the corporation, there are a couple of different kinds that exist, and depending on the nature of your business, you want to look carefully into which might be best suited to your situation. A-C Corp is completely separate from its owners. Therefore, you are not liable for any activity that involves the corporation.

That said, they are more costly to establish. Not to mention, there are far more processes, bookkeeping and documentation filing that need to be done yearly to maintain the corporation. You will also have to pay tax on the business's profits. And C corporations are taxed twice—so keep that in mind.

One definite advantage with a C Corp is that you can raise money by selling shares of stock to investors.

S Corp

An S Corp is an entity in which the company can avoid the double taxation factor. That is to say, in an S Corp, some of the profit as well as loss is allowed to pass through to the owner's taxes and thus isn't subject to corporate tax.

An S Corp does have a different process involved as far as registering with the state and it also has to file with the IRS to gain an S Corp status.

Nonprofit corporation

If you intend to run a charity of some form or otherwise engage in work that benefits the public, you might qualify as a nonprofit. Nonprofits in some instances can be tax-exempt. And thus, you would not be paying either state or federal tax on any money made. As with an S Corp, the registration process for a Nonprofit is going to be different at both government levels.

In terms of what you can do with profits earned, there are fairly stringent regulations that come into play. So you most definitely want to be aware of what those are. Nonprofits are generally referred to as 501(c/)(3/) corporations by IRS guidelines.

If you are considering incorporating your small business or establishing an LLC and need some additional capital to do so, we can help! Our business loan programs are fast, flexible and are designed with small business owners in mind. Call today!

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