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How Should You Organize Your Business?

Posted by Neha De

December 29, 2020    |     5-minute read (978 words)

From proprietorship to LLC to C-Corp and beyond, there are several business structures available to you for making your startup official. However, before you register your business, you will first need to figure out which type of organizational structure best suits you, as this will dictate your tax payments, your personal liability, your ability to raise capital and more, so choosing correctly is crucial.

Check out the most common business structures before you decide which format matches your needs:

Here’s the Scoop with Sole Proprietorship

Under this structure, you’ll maintain complete control of your company, but your business assets and liabilities will not be separated from your personal ones, so you can be held personally liable for your firm’s debts and obligations. Anyone carrying out business activities without registering as a different business structure is automatically considered a sole proprietor.

Some business owners who take the sole proprietorship route find that they have issues getting business loans and are unable to sell stocks. However, if you get a business name assigned to the firm, you aren’t solely operating under your own name.

Teaming Up? Consider a Partnership

If you’re planning to go into business with another person (or more people), you might consider launching either a limited partnership or a limited liability partnership.

Here’s the difference: In a limited partnership, one general partner has unlimited liability, while the others have limited liability. However, in a limited liability partnership, all partners have limited liability, which protects them all from obligations and debts against the company — the partners are also not responsible for each other’s actions.

“Partnerships can be a good choice for businesses with multiple owners, professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business,” advises the Small Business Administration (SBA).

Here’s What an LLC Entails

In a limited liability company (LLC), the owner is typically protected from personal liability, meaning their own assets won’t be at risk if the LLC faces a lawsuit or defaults.

Under this structure, you are considered to be self-employed and must pay self-employment tax, as well as contribute toward Social Security and Medicare. Profits and losses can become personal income without facing corporate taxes.

According to the SBA, “LLCs can be a good choice for medium- or higher-risk businesses, owners with significant personal assets they want to be protected, and owners who want to pay a lower tax rate than they would with a corporation.”

Should You Be a Corporation?

If you decide to form a corporation, you’ll have a few different types from which you can choose. Here are your options:

C corporation: This entity is typically more expensive to create than a sole proprietorship, partnership or LLC, but it allows you to legally separate the business from its owners, offering them strong liability protection.

If you decide to launch a C corp., you must be ready to create strong operational processes, reporting and recordkeeping. You’ll have to pay income taxes on the business’ profits (and you’ll pay taxes on dividends you pay to shareholders, when applicable), but if you choose to, you can raise money via sales of stocks. If one owner leaves the operation, you can generally keep doing business exactly as you did in the past.

If your eventual goal is to raise money, go public or get acquired, the C corp. could be a good choice for your business.

S corporation: This business structure allows its owners to avoid being double-taxed like a C corp. would. Profits (and some losses) can pass directly to the personal income of its owners without facing corporate tax rates.

The company cannot have more than 100 shareholders, and all shareholders must be U.S. citizens. If a shareholder sells shares or leaves the firm, the company can keep doing business as it was.

The SBA says, “S corps. can be a good choice for businesses that would otherwise be a C corp., but meet the criteria to file as an S corp.”

B corporation: Also known as a benefit corporation, a B corp. is taxed the same way as a C corp., but this type of company is driven by both profit and mission. The business is charged with producing a public benefit in addition to profits, and certain states require a B corp. to submit annual benefit reports.

You don’t necessarily need to hire a third-party certification service to register as a B corp. if the legal status is available in your state. However, it is advisable to get help in order to get the appropriate paperwork in place.

Would a Cooperative Suit You Better?

Owned by those who use its services, coop members can join the cooperative by buying shares, but all members have the same voting power. The most unique part of a coop is that profits and earnings are distributed among members.

Members typically have voting powers of the coop’s activities, while a board of directors is typically created to make the regulations.

What About a Nonprofit Corporation?

If your firm was created to perform charity, religious, educational, literary or scientific work that benefits the public, then this structure could be for you. Nonprofits may be exempt from having to pay taxes, but they need to file with the Internal Revenue Service (IRS) to receive this exemption (separately from registering with the state).

Rules dictate what these businesses can do with their profits — for instance, they cannot be distributed to members. You may know nonprofits by their IRS code name, which is 501(c)(3).

Don’t Forget to Check the Regulations in Your Area

Before you register your business, find out the local regulations in the area where you’re planning to register to ensure that you’ve got all of the processes in place.

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