You’re charged up and ready to become an entrepreneur. After considerable thought, you’ve got a firm grasp on what your business will offer customers and you’ve even decided on a catchy name for your new company.
Now it’s time to start making things official. One of the first things to do is register your new business with the state government, a service typically handled by the Secretary of State. Before going any farther though, it’s time to decide which kind of business is right for you.
There are five legal types of business entities to choose from, each with their own advantages and disadvantages.
Sole Proprietor - This is the most basic type of business you can start, in fact, many states don’t even require that you register as a business if your name is part of the business name (ie. John Smith Consulting). Unfortunately this structure carries a bit more risk since you are personally liable for the business. Simple and easy to setup, but carries personal risk.
Partnerships - A lot like a sole proprietor except that ownership is shared by two or more people. Partnerships have to be registered with the state, and partners are held personally liable for the business.
Corporations - A complex structure in which each of the owners is issued company stock. A corporation is often viewed the same as a person from a legal perspective. Corporations earn profit which gets taxed as income and those profits get paid out to shareholders via a dividend which shareholders must pay taxes on. Shareholders can’t deduct losses by the corporation, but they also aren’t held liable for the debts of the corporation.
S-Corporations - A specially designed corporate structure that allows profits and losses from the corporation to flow directly to the shareholders thereby avoiding the double taxation of traditional corporations.
Limited Liability Company (LLC) - A relatively new business structure that has become quite popular for small businesses that blends the benefits of a sole proprietor or partnership with the advantages of a corporation. In an LLC, the owners are not liable for the debts of the company, but like an s-corporation profits and losses flow directly to the owners thereby avoiding double taxation.
Check your local regulations and consult other small business owners in your area before deciding which sort of business is right for you. The LocalUp staff also have quite a bit of experience launching businesses and are always very helpful.
So which one is right for you?