When starting a small business, one important decision you will have to make is what kind of structure you will adopt when registering your business. There are several types of business structures that you can choose from. Not every type of business structure is suitable for every prospective business owner. When selecting a business structure, it’s important to take the future plans for your business into consideration so that you select a structure that will grow with your new venture.
Sole proprietorships are the business structure of choice for many entrepreneurs who are running a business all on their own. This often includes individuals who run a service business, such as a freelance writer or graphic designer who has no employees. For legal and tax purposes, the owner of a sole proprietorship is in complete control of business operations, they also are completely liable for any issues arising from the operation of the business. A sole proprietor pays business taxes on a personal income tax return.
A partnership is similar in structure to a sole proprietorship, but has several members instead of just one. Profits and losses are shared by members of a partnership; and they also share control and liability of the business. Members of a partnership pay business taxes on their personal tax returns, just as sole proprietors do.
There are two types of corporations. A C-Corporation is a separate business entity from the owners; this shields the owners from liability. A small business owner can establish their business as an S-Corporation, the difference being that they have the liability protection that a C-Corporation, but they are taxed at lower individual rates.
Finally, a limited liability company, or LLC, is a business that can be formed by a group of members in place of a partnership. In an LLC, the members can pay tax through their personal tax returns and LLC members enjoy the liability protection of a corporation.