Entrepreneurs seeking to launch their businesses face a lot of decisions during that process. One of the most important ones is which business structure to choose. If you are looking to jump-start a business venture, how do you know which structure is best for you and your company?
Each business structure has different benefits, as well as various risk levels. Here is information about the four main business structures so you can evaluate what might be the best choice for your business:
With a sole proprietorship, you have complete control of your business. You don’t establish a separate entity with a sole proprietorship though, so you take on all the risks for your business. Your personal assets and liabilities aren’t separate from your business ones.
Sole proprietorships work best for low-risk ventures, where you want to see how your business goes before choosing a more established business structure.
Limited liability corporation (LLC)
Limited liability corporations (LLCs) are easy to set up and protect your personal assets (such as your home or savings accounts) from your business liabilities. So, with an LLC, if your business goes bankrupt or faces a lawsuit, that won’t affect your personal finances.
You also don’t face corporate taxes with an LLC. You report your business income on your personal income taxes.
Limited liability partnership (LLP) or limited partnership (LP)
If you will be launching your business with someone else or a group, where you will own it jointly, you may want to consider a limited partnership (LP) or limited liability partnership (LLP). With a limited partnership, only one partner receives unlimited liability and any additional partners have limited control over the company.
On the other hand, limited liability partnerships give limited liability to each partner and also protect partners from business debts. Partners in LLPs also won’t be held responsible for the actions of other partners.
Establishing your business as a corporation will give you the most protection from shielding your personal finances from your business operations. However, corporations also are expensive to set up and can face double taxation: taxes on business profits and when dividends are paid to shareholders (those must be reported on shareholders’ tax returns).
If you are looking to publicly offer stock for sale in the near future, choosing to establish your business as a corporation might be the best move.
Choosing a business structure is a way to help protect both your business and your personal finances in the long term. In the future, as your business evolves and changes, you may need a new business structure to help sustain your growth.