You are ready to take the jump and legally set up your business. How exciting! When you decide to start a business, your first step is choosing a business structure. Your business structure impacts: taxes, filing and reporting requirements, and personal liability. All of this to say - picking the right business structure for you is a really important step.
The three most common business structures used in the United States are: Partnerships, Corporations, and Limited Liability Companies.
There are two types of partnerships: Sole Proprietorship and Partnerships.
- Sole Proprietorships: This is an unincorporated business owned by a single individual. While easy to start, Sole Proprietorships do not distinguish between personal and business liabilities. This means you can be held personally responsible for business debt and obligations
- Partnerships: You can think of these as joint sole proprietorships - business owned by two or more individuals. They are also easy to set up and do not distinguish between personal and business liabilities. The difference is the liability is split between owners.
Corporations including C-Corps and S-Corps.
- C-Corps: C-Corps are a legal business structure that separates personal and business liabilities. They offer excellent protection to business owners from liability but also require extensive record keeping, operational systems, and reporting. Not to mention, they are expensive to set up.
- S-Corps: This is a special type of corporation that allows some of the losses to be passed directly to an owner's personal income tax. State taxation of S Corps vary. Similar to C-Corps, these are expensive to set up, restrictive to run, and require a lot of reporting.
Limited Liability Company (Our Favorite!)LLCs combine the best features of a proprietorship with a corporation. They are easy to set up, limit personal liability, and allow for pass through taxes (meaning an owner can claim losses on personal income tax).
What's an LLC?
Limited Liability Corporations (LLCs) are one of the newest forms of business structures in the United States. In fact, the first LLC wasn't formed until 1977 by a company in Wyoming and most other states did not adopt LLCs as a legal structure until the 1990s.
Today, LLCs are governed by individual states. This means each state has slightly different rules around what is required.
An LLC is a hybrid business structure that combines the best features from corporations, sole proprietorships, and partnerships. It offers LLC owners liability protection, flexible management, and certain tax advantages.
What are the advantages of an LLC?
If you’ve done your research, you’ll see one of the first decisions you have to make is whether to establish your business as a corporation or a limited liability corporation (LLC). There are tons of reasons why each is a valuable direction. We recommend incorporating as an LLC for the limited personal liability, tax structure, and governance flexibility.
#1. Limited Liability: Like the name suggests, limited liability corporations reduce the risk that owners face. When you incorporate, you establish a new legal entity that takes on the risk of the business. This means that the incorporated entity (your business) owns the assets, debts and liabilities, not the individual owners.
#2. Tax Structure: As an LLC, you get to choose whether you are taxed as a corporation or as an individual where you pass-through the company’s losses or gains. You do not have the option to choose the structure by which you are taxed as a corporation. If you’d like to learn more, check out The Balance Small Business or Legal Zoom.
#3. Governance Flexibility: LLC’s give you the most flexibility with how you set up and govern your company. As detailed on Investopedia, you are required to provide a ton of additional information when establishing your corporation. When you establish your LLC, you are normally only required to file your articles of organization, which can usually be completed online quickly. Read on to learn how to receive your articles of organization in minutes from home!