As a business owner just starting out, one of the most important decisions you will make is how to structure your company. Different formation types exist, each offering their own benefits and downsides. Your selection may affect all aspects of your business, from its operation to its growth and longevity.
Taking various factors into consideration when choosing your structure type may help ensure you select the best option for your business needs and goals.
According to the U.S. Small Business Administration, the business structure you choose may affect how much and how you pay your taxes. Some structure types allow you to include your business’ assets and liabilities in your personal income taxes, while others require separate filings for your company. For example, through a limited liability company, your company’s profits and losses pass through to your personal income. While this may mean you do not have to pay corporate taxes for your company, you may have an obligation to pay self-employment taxes.
The formation type you select for your fledgling business also affects your liability. For example, should you choose to establish a sole proprietorship or partnership, you may find your personal assets on the line in the event of a bankruptcy or lawsuit. Forming as an LLC or corporation, on the other hand, separates your business and personal assets. Therefore, your personal assets such as cars or real estate may not be at risk should your company have to file bankruptcy or face legal action.
Some structure types require little to no action in order to form, while others need specific paperwork and have several requirements. If you want to structure as a sole proprietorship, for instance, you do not have to file any formation paperwork. Rather, simply engaging in business activities establishes this business type. Creating LLCs and corporations require filing certain forms with the state, and these structure options may require more thorough record-keeping and reporting.