Once you’ve decided on the business you want to open, your next decision should be how your company will be structured. The entity structures you have to consider are sole proprietorship, partnership, corporation, and limited liability company (LLC).
Whichever structure you choose will be a defining factor in the way you operate your business, so it is important to weigh your options very carefully.
To help you choose, here are some of the things that you should consider:
- The nature and size of your business.
- How much control you want to have.
- The degree of structure you want to have.
- Whether the business will be vulnerable to lawsuits.
- Expected profit (or loss) of the business.
- Whether you need to reinvest earnings into the business.
- Your need to access cash for yourself out of the business.
- The tax implications of the different structures.
Following are brief summaries of the different business ownership structures:
- Sole Proprietorship – The majority of small businesses begin as sole proprietorships, owned by one person, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all assets of the business and any profits it earns. They are also solely responsible for any of the company’s liabilities or debts. In the eyes of the law and the public, a sole proprietor is one in the same with the business.
- Partnership – In a partnership, two or more people share ownership of a single business, and the law does not distinguish between the business and its owners. The partners should have a legal agreement that clearly states how decisions will be made, profits will be shared, and disputes will be resolved. It should also delineate how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed. The partners also must determine how much time and capital each will contribute to the business.
- Corporation – There is a very important difference between a corporation and either a sole proprietorship or a partnership. By law, a corporation chartered by the state in which it is headquartered is considered a unique entity, separate and apart from its owners. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The personal assets of the owners are protected under this structure. The owners are a corporation’s shareholders, who elect a board of directors to oversee major policies and decisions. As a separate entity, the corporation does not dissolve when ownership changes, but can continue through stock transfers.
- Limited Liability Company (LLC) – The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to combine the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership, but less so than that of a corporation. As with a corporation, the personal assets of the owners are protected. The LLC owners are members, who usually determine the duration of the company when the organization papers are filed. The time limit can be continued by a vote of the members at the time of expiration.
As you can see, there are many differences among the major forms of ownership. It is a good idea to discuss your needs with an accountant and attorney who can advise you on which structure is best suited for your needs.