How to Choose a Small Business Owner Structure

31
March 2022

The type of structure you choose for your business can significantly impact your short and long-term success. If you still don't know whether to opt for a sole proprietorship, a corporation, or an LLC, we can give you a hand!

A guide to picking the best business structure for your business.

Read our guide to learn about tax, legal, and financial implications on the most common types of business entities. Weight the advantages and disadvantages behind each business structure and align your vision with reality! 

Common Business Structures

1. Sole Proprietorship

In a sole proprietorship, the business owner has complete accountability for their business. Because in legal terms, you and your business are one entity. Entrepreneurs typically choose sole proprietorship as they first venture into entrepreneurship due to the low initial costs. But as their business grows and evolves, they eventually move on to a more solid type of business entity that protects their personal assets. 

Pros of a Sole Proprietorship: 

  • Minimal initial paperwork required 

  • Less expensive type of business entity in terms of taxation and setup costs. 

  • As an owner, you'll be fully entitled to all of your business's profits. 

  • Less legal implications compared to other types of business entities. 

Cons of a Sole Proprietorship: 

  • You are 100% liable for all your business debt, liabilities, and legal issues. 

  • In case someone files a lawsuit against your business, it will automatically be filed against you. 

  • By not separating you and your business as separate entities, you also put your personal assets at risk.

  • A high-risk option for businesses that want to grow and expand. 

2. Partnership

A partnership could be a good option if you are starting a business and want to share the risks and benefits. Unfortunately, many attribute the term partnership to big legal firms that decide to work together. But this type of business structure is accessible to two or more people working on one business idea. Small business owners usually opt for partnerships to start a family business with relatives or their couple. 

In dividing ownership, you can use a 50%-50% model, but both parties can freely decide how to split up liabilities. To avoid any misunderstanding and dispute, we recommend that you establish and consent to the terms and conditions in a written agreement, especially if there's family involved! 

Pros of a Partnership: 

  • You get to merge different partners' experience, talent, and power into one business.

  • Easy to establish. 

  • They may be subjected to fewer legal regulations than corporations. 

  • Business taxes are filed by filling out a partnership income tax return.

Cons of a Partnership: 

  • Unlimited liability. 

  • General partners are individually and personally accountable for the business. 

  • Puts partner's personal assets at risk.

  • Disputes or conflicts could lead to dissolving the partnership or partner withdrawal. 

3. Limited Liability Corporation (LLC): 

In an LLC, partners are referred to as "members." This type of business structure can give you both the benefits of corporations and partnerships. Why? Because each member's assets are protected, in most cases, against business bankruptcy or lawsuits. Additionally, all business profits and losses are also filed as corporate taxes. However, LLC members are considered self-employed and required to pay the self-employment tax for Medicare and Social Security.

If your business is composed of a few members who want to protect their assets and have a high risk of litigation, this could be the right choice for you. 

Pros of LLCs: 

  • A good option for larger businesses that don't want to deal with the legal complexities and tax rates associated with operating a corporation. 

  • Solid protection if you have a high-risk business. 

  • This entity protects member's personal assets

  • Most likely to pay fewer taxes than with a corporation. 

Cons of LLCs:

Each state separately regulates LLC. For example, some states require LLCs to be dissolved and reformed if members leave the group unless a legal agreement details how to handle buying, selling, and transferring ownership.

More legal and tax regulations than sole proprietorships and partnerships. 

Employees sitting down on a table discussing their type of business entity

4. Corporations

In a corporation, multiple shareholders hold business stocks. It is a legal entity that is separate from its owners. Even if corporations are more costly to establish than partnerships or sole proprietorships, it is the safest option for owners that want to stir away from personal liability. Corporations also require significantly more extensive record-keeping, operational processes, and reporting than other business structures. 

Types of Corporations:

C corporation: 

If you opt for this type of corporation, you and your business will be taxed separately. Whatever profits you receive as a business owner will be taxed as part of your income. 

They offer the most substantial protection against personal liability, but it's typically more costly to establish than other business structures. 

S corporation: 

The name means "small business corporation." This type of business organization allows profits, and some losses, to go directly to the owner's personal income without becoming subject to corporate tax rates.

Pros of a Corporation: 

  • Limited liability, you will only be accountable for your own stock in the corporation. 

  • This business entity also protects your personal assets.  

  • A solid and dependable structure that doesn't just rely on a sole proprietor or partner.

  • An organized business entity where you are obliged to keep track of transactions.

Cons of a Corporation:

  • More regulated and monitored by the government than a sole-proprietorship or partnership. 

  • Higher organizational and operational costs. 

  • Double taxation on the business income and shareholders also pay taxes on dividends received.  

5. Other types of business structures:

Nonprofit Corporations

This type of business structure is only suitable if your business' purpose is performing charitable educational, religious, literary, or scientific work for the benefit of the public. Any profits made by this entity can only be used to pay for its expenses, programs, charitable giving, and other associated purposes. 

Because you as an owner don't generate any profits, if you qualify, you are tax-exempt. As a nonprofit, your company follows organizational rules similar to those of a standard C corp, along with special rules governing profits.

Cooperatives

A cooperative is a business that's owned and operated for the benefit of the organization's members. So, whatever profits the cooperative earns are shared among its members. This also means that all of its members equally partake in business operations. A cooperative must have bylaws, formal membership applications, a board of directors, and regular member meetings.

Talk with a professional before choosing your business structure.

Choosing the correct type of business for your company is crucial if you want to consolidate long-standing processes and growth. Your structure will affect many areas of your business: taxation, legal, local, or state regulations, financial and personal liabilities. Please consult with a trusted legal professional or accountant before taking the first steps to register your business

Access to working capital for your business!

After carefully reading our business entity guide and talking to your legal advisor and accountant, you can move on to the next vital step. It's time to access working capital for your business! 

Owners of smaller businesses often struggle to access working capital from bank loans. This is especially true if you're figuring out how to get your business off the ground and have less than three months in business. You may not have the time, know-how, patience, or credit history to qualify for the same financing options designed to meet big businesses' needs.

One Park Financial believes that small and mid-size businesses should have easy access to working capital. As a result, we connect you with funders who specialize in working with small and mid-sized enterprises and are willing to work with people who don't have perfect credit. So fill out our online application and Get Pre-Qualified Today! It only takes minutes.