Entrepreneurship 101: Which Business Structure is Right for You?
In recent years, there has been a groundswell of people venturing into the land of entrepreneurship. If that person is you, then welcome! Entrepreneurship can be as rewarding and fulfilling as you make it. However, it can also be utterly terrifying. What can be more terrifying is attempting to navigate business aspects that you do not completely understand. One of the first questions most entrepreneurs have is what business structure should be used for their company. Below are some of the most common business structures that will help you determine what structure will suit your small business needs best.
A sole proprietorship a business entity that legally has no separate existence from its owner. Income and losses are taxed on the individual’s personal income tax return. A sole proprietorship is easy and simple to form and is generally less regulated than other business structures. The drawback to this type of business structure is that if the business fails, the losses will be on the individual.
A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. A corporation is generally guided by a group of officers known as the board of directors. One benefit of a corporation is that a corporation’s shareholders generally are not liable for any debts incurred or judgments handed down against the corporation. One of the disadvantages of a corporation includes double taxation. Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.
Limited Liability Corporation (LLC)
A Limited Liability Corporation is also separate and distinct from its owners. However, an LLC’s owners are generally not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. For taxation purposes, an LLC can choose to be taxed as an S-Corporation or a C-Corporation. An S-Corporation itself is not subject to federal income tax. Instead, the owners are taxed upon their allocated share of the income. One advantage of an LLC is generally, there are less formalities than a Corporation.
A nonprofit corporation with a public purpose is an organization that qualifies for tax-exempt status. Non-profit corporations cannot operate for profit and the funds acquired by the organization must stay within the corporate account to pay for reasonable expenses like salaries and activities of the corporation.
Hopefully, this primer has helped you determine what type of business structure suits your small business.
However, it is understandable if you still have questions. If you are considering starting a business, contact a competent Orlando Business Lawyer or Washington DC Business Lawer at Mosaic Law Firm at info@themosaiclawfirm. Our attorneys are here to assist you with your business needs.