When starting a business, most people place emphasis on the idea of its viability and its potential for profit. This is absolutely the right place to focus. Once you’re clear about what you’d like to achieve during the planning process, you then need to give serious consideration to the ‘nuts & bolts ‘ of the business structure under which you’ll legally operate: What kind of business entity will you be? This step is all-too-often an afterthought, but the decision can have serious consequences. Factors in your decision to operate as a sole proprietorship, a partnership, a corporation, or an LLC include the nature of your business, its riskiness, and whether investors will be involved.
The following are the five most popular business structures in today’s environment:
1. Sole Proprietorship
3. Corporation (C-Corp)
4. Sub S Corporation (S-Corp)
5. Limited Liability Company (LLC)
You can familiarize yourself with them further, by reading the whitepaper that I wrote on the subject if you want more in depth coverage. However, if you want my opinion as an entrepreneur, who’s started multiple businesses, I’m happy to offer it to you. The sole proprietor and partnership are the easiest and cheapest business structures to get going with, however, they don’t offer the protections of incorporating such as limited liability. So, if you’re going to start a consulting service or another low risk business, you can get going with a sole proprietorship and purchase business liability insurance. As your business grows and you want to hire employees, raise capital from investors, bring on partners, then you incorporate, such as setting up as an LLC down the road so you don’t need to incur those incorporating costs today which can run from $300 to $1500 depending upon which state you live in.
Now, if you’re going to be raising capital, have multiple business partners, have higher risk business (i.e, anything in food service) or just want a corporate structure right off the bat, you can incorporate. I like the LLC structure because it offers you the protection of a corporation, shielding you from liability, but also offers you the tax benefits of a partnership- all income generated flows directly to you so you only pay taxes once on the income that you earn based on your ownership % of the LLC. Also, it’s governed by an operating agreement that gives you flexibility in how you operate the business management. It’s not typically as restrictive as a corporation. Watch a short video by New York attorney, Franklin Simpson, offering low cost tips on setting up as a sole proprietor and then incorporating as an LLC later on.
There are always special circumstances and exceptions to incorporating, so you if you have a question or are confused, you can check with your legal counsel for guidance that’s appropriate for your situation. As always, keep me posted with your feedback.