What is the Best structure, I should choose when starting a new business?

When launching a new business, one of the most important choices you will face is selecting the appropriate entity structure. This legal framework dictates how your business will be taxed, owned, and managed. Choosing the right structure can significantly influence your business’s liability, tax obligations, and overall success.

Here’s a breakdown of the most common entity structures and their key characteristics:

Sole Proprietorship

• Definition: A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by only one person and in which there is no legal distinction between the owner and the business entity.
• Pros
  • Effortless to set up and manage – experience the convenience for yourself!
  • No formal paperwork or filing requirements are necessary, making the process hassle-free and efficient.
  • Taxed as personal income
• Cons:
  • Unlimited personal liability
  • Limited access to capital

Partnership

• Definition: A partnership is an agreement where parties agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations.
• Types:
• General Partnership: General partnerships (GP)are the easiest and cheapest type of partnership to form.  Two or more general partners own it, with joint and several legal liabilities for all debts and obligations. They jointly manage and control the business.
• Limited Partnership: A limited partnership (LP) is a type of partnership that limits the legal liability of some partners for debts and obligations. At least one limited partner is a passive contributor of cash and An LP gives contributors a way to invest without incurring legal liability.

Limited Liability Company (LLC)

• Definition: This type of business structure is known as a Limited Liability Company (LLC). An LLC offers flexibility and protection to its owners, often referred to as members. It allows them to participate actively in managing the company while shielding their personal assets from business debts and liabilities. Moreover, the pass-through taxation feature means that the company’s income is only taxed once, at the individual level, thereby avoiding the double taxation faced by traditional corporations. This makes LLCs an attractive option for entrepreneurs seeking a balance between operational control and financial security.
• Pros:
  • Limited personal liability
  • Pass-through taxation (avoiding double taxation)
  • Flexibility in management structure
• Cons:
  • More complex setup and annual filing requirements
  • Potential for state-level taxes

Corporation

• Definition: A corporation is a legal entity created by individuals, stockholders, or shareholders, with the purpose of operating for profit. Corporations are allowed to enter into contracts, sue and be sued, own assets, remit federal and state taxes, and borrow money from financial institutions.
• Types:
  • C Corporation: It is the most common form of incorporation among businesses and contains almost all of the attributes of a corporation. Owners receive profits and are taxed at the individual level, while the corporation itself is taxed as a business entity.
  • S Corporation: It is created in the same way as a C Corporation but is different in owner limitation and tax purposes. An S Corporation consists of up to 100 shareholders and is not taxed separately – instead, the profits/losses are shouldered by the shareholders on their personal income tax returns.
• Pros:
  • Limited personal liability
  • Potential for easier access to capital
  • Perpetual existence
• Cons:
  • More complex setup and ongoing compliance requirements
  • Double taxation for C corporations

Factors to Consider When Choosing an Entity Structure

• Liability: How much personal risk are you willing to take?
• Taxation: What are the tax implications for your particular business situation?
• Funding: How do you plan to raise capital for your business?
• Succession Planning: How do you anticipate your business continuing after you retire or pass away?
• Future Growth: Do you expect your business to grow considerably in the future?

Choosing the right entity structure for your new business is a vital decision that can greatly influence your liability, taxation, and overall success. Each structure presents unique benefits and drawbacks, and the optimal choice will depend on your individual situation.

Key Takeaways:

• Consult with a professional: Seek advice from a lawyer or accountant to ensure you select the structure that best aligns with your business goals and legal requirements.
• Consider your future: Think about how your business may evolve with the passage of time and choose a structure that can accommodate future growth.
• Stay informed: Stay up-to-date on changes in tax laws and regulations that could affect your entity structure.

By carefully evaluating your options and making an informed decision, you can lay a strong foundation for your new business and set yourself up for success, Why not ask Virtual Bookkeepers 365 US-based accounting and bookkeeping experts about this? Our technology solutions address your Accounting, payroll, and tax compliance needs to support your business. Contact Virtual Bookkeepers 365 and focus on what you do best: growing your business.