As you consider starting a small business, you should think what business structure is best for small businesses. When you’re ready, there are a few decisions that you’ll have to make regarding a structure. Much will depend on the type of business you have and how many people are involved. Additionally, your choice of business structure will dictate the income tax returns that you have to file.
Picking the correct legal structure for your small business begins with analyzing your company’s goals, as well as taking local, state, and federal laws into consideration. Once you’ve defined your goals, you can choose the legal business structure that best fits your company and its culture. Remember that as you grow your business, you can later change your legal business structure to meet its new needs.
Types Of Business Structures
The most types are:
• Sole Proprietorships—the easiest and fastest way to get into business with just one person responsible for everything including liability
• Partnerships—similar to sole-proprietorship, but with two people sharing liability; in both cases, there is no legal separation between the business and owners
• Limited Liability Companies (LLC)—allows owners and partners to limit their risks and personal liabilities while enjoying the tax benefits of a partnership
• Corporations—a separate legal entity from the owners, it includes limited liability, continuity regardless of the owners, and can operate on its own indefinitely
• S Corporations—a subset of corporations that report “flow-through” of income, and elect to pass corporate income, losses, deductions, and credits through to their shareholders
Sole proprietorships are the easiest and come with the least amount of governmental regulation. Partnerships are next and only require two people to start. We suggest drafting a partnership agreement.
LLCs and corporations allow the owners to be free from any liabilities that come with company ownership. You can read more about these structures on the IRS’s website.
Which Model Is Right For You?
Much will depend on the business itself, what you want to do, and if you want to grow your business. Another factor is whether you hire employees.
It’s easy to start as a sole proprietorship or partnership and later take the next step up to an LLC. A corporation is more complicated and will cost more to begin, but ultimately help take your business farther.
One consideration is when you’re ready to retire from your business. Sole proprietorships and partnerships generally dissolve, ending the business. However, owners can sell LLCs and corporations to new owners who can continue the business or take it in a new direction.
Since nonprofits are also businesses, incorporating is usually a better business model for them. The nonprofit is a separate legal entity, the owners and officers have lesser liabilities, and the organization can take advantage of specific tax benefits as a 501(c)(3), such as tax exemptions.
You can read more about these structures on the Small Business Administration’s website.
Have Questions About Your Business Structure? Call James Provenza
We have over 20 years of experience helping startups and small businesses in the Chicago area with their business structures and all types of legal matters. Attorney James C. Provenza can ensure that all your legal requirements are done correctly. Contact our office at (847) 729-3939 today or use our online contact form. We look forward to helping ensure that your organization is successful.
