The Small Biz Decisions: To Incorporate or Not
Thinking of starting a business? You should know that the way you choose to structure your business for official and tax purposes matters. It can impact how much you pay in taxes, whether partners are allowed to participate in managing the business, and your amount of personal liability. Here are a few of the most common business types, and what you need to know about some of their major differences.
If your business is all you, from vision to execution, to operating out of your house and spending all your own money, a sole proprietorship is likely your best option, at least to start. A sole proprietorship is simple and straightforward and is not taxed separately. Starting a sole proprietorship might involve registering a trade name, filing for local licenses or business permits, and opening a business bank account. As a sole proprietor, you have complete control, but also complete liability, which means that if anything goes wrong, it's on you. Most experts agree that a sole proprietorship is a great way to get a business going. But if your business is successful, you'll likely need to shift to a different structure down the line.
If you're collaborating with one or more partners on your new venture, you might consider a Limited Partnership (LP) or LLC structure. These business structures are similar and related, with some important differences.
- Limited Partnership: With an LP, there are two types of partners: general and limited. General partners can control and manage the company but are fully liable for the company's actions. Limited partners can invest in the company and benefit from its success, but they don't get any official say in how the company operates. Like a sole proprietorship, an LP offers "pass-through" taxation; unlike a sole proprietorship, it gives certain members more personal liability protection.
- Limited Liability Partnership: An LLP structure offers more flexibility and protection for all partners involved. Everyone can be involved in running the business if you want it to be that way. In addition, all partners have personal liability protection, depending on the circumstances. This option offers you greater protection, but potentially less control.
- Limited Liability Corporation: An LLC can be started by a single owner or multiple owners, and offers personal liability protection for all members. LLCs can also have other businesses as members. LLCs also offer tax options, allowing you to choose the type of taxation that makes the most sense for your business.
Rules about LPs, LLPs, LLCs, and who is allowed to form them can vary by state, so check your state law to find out what is required.
C Corporations (C-Corps) are business entities that are legally separate from its owners and/or founders. One major advantage of a corporation is the level of liability protection it offers. Another advantage is that a corporation can raise money by selling stock. If the general public believes in your business and wants to invest, it will be easy to raise capital. Corporations are usually taxed at a higher rate and can be more complicated and time-consuming to operate, due to paperwork and tax requirements.