Find out which business structure is right for you

Sole proprietorship, partnership, LLC or corporation? Which structure is best for you? Sole proprietorship, partnership, LLC or corporation? Which structure is best for you?     Hi   Welcome to Part 5 of our Business Starter Toolkit. Last time we looked at funding options and this week we focus on the complex world of business structure. Getting this right could be the difference between success and failure. The wrong business structure could have big implications on tax and liability. In this easy to follow guide we help you identify the best one for you.   Before you start establishing your business you need to decide on its structure. Your choice of business structure depends on the multiple variables: how many people will run the company, how much liability you're willing to put on the line, etc.   It can get quite confusing and overwhelming. The good news is that you have the option of changing your structure as your business evolves, so there's no need to worry about locking yourself into a bad decision.   In this email, we'll detangle the confusion of business structures and help you choose the perfect one for your startup.   Types of business structures There are 7 main types of business structures in the United States. These structures are applicable to both brick and mortar businesses and ecommerce businesses:   Sole Proprietorships Partnerships Limited Liability Company (LLC) C-corp S corp B-corp Nonprofit Hi   Welcome to Part 5 of our Business Starter Toolkit. Last time we looked at funding options and this week we focus on the complex world of business structure. Getting this right could be the difference between success and failure. The wrong business structure could have big implications on tax and liability. In this easy to follow guide we help you identify the best one for you.   Before you start establishing your business you need to decide on its structure.Your choice of business structure depends on the multiple variables: how many people will run the company, how much liability you're willing to put on the line, etc.   It can get quite confusing and overwhelming. The good news is that you have the option of changing your structure as your business evolves, so there's no need to worry about locking yourself into a bad decision.   In this email, we'll detangle the confusion of business structures and help you choose the perfect one for your startup.   Types of business structures There are 7 main types of business structures in the United States. These structures are applicable to both brick and mortar businesses and ecommerce businesses:   Sole Proprietorships Partnerships Limited Liability Company (LLC) C-corp S corp B-corp Nonprofit Sole Proprietorships   A sole proprietorship is the simplest business structure. It's the standard structure of all solopreneurs for a good reason: the setup process is very quick. If you're starting your business alone, a sole proprietorship is a good structure to choose. Almost all businesses begin as a sole proprietorship and then evolve intro more complex structures over time if required.   Advantages of choosing Sole Proprietorship Quick setup - There are very few setup requirements for a sole proprietorship. If you wanted to stay as lean as possible, you could run a sole proprietorship under your name only without registering a business name.   Uninhibited decision making - If you run a business as a sole proprietor you don't have anyone else to answer to. No business partners. No investors. Just you and your vision.   Simpler and cheaper tax returns - Of all the business structures, tax returns for a sole proprietorship are the simplest to file. As a result many solopreneurs prefer to file their own tax returns, at least in the early stages of establishment before things get too complicated.   More money for you - Because you're the sole owner of the business, you're free to decide on your salary. You're under no obligation to set aside a certain amount towards other areas of the business.   Easy to dissolve - If for whatever reason you decide that running a business is just not for you, as a sole proprietor you can readily dissolve your operations in just a few steps.   Disadvantages of choosing sole proprietorship Decreased chances of funding - In order for banks to offer you a loan, they need to be satisfied that you have sufficient assets to cover the value of the loan in case of any problems with repayments.   Unable to split equity - This inability to split equity is what prevents many sole proprietorships from securing investor funding. Investors almost always want a slice of the pie in exchange for their investment.   Greater risk - The main disadvantage of a sole proprietor setup is that it poses the greatest risk to your possessions (and therefore your family).   Sole Proprietorships   A sole proprietorship is the simplest business structure. It's the standard structure of all solopreneurs for a good reason: the setup process is very quick. If you're starting your business alone, a sole proprietorship is a good structure to choose. Almost all businesses begin as a sole proprietorship and then evolve intro more complex structures over time if required.   Advantages of choosing Sole Proprietorship Quick setup - There are very few setup requirements for a sole proprietorship. If you wanted to stay as lean as possible, you could run a sole proprietorship under your name only without registering a business name.   Uninhibited decision making - If you run a business as a sole proprietor you don't have anyone else to answer to. No business partners. No investors. Just you and your vision.   Simpler and cheaper tax returns - Of all the business structures, tax returns for a sole proprietorship are the simplest to file. As a result many solopreneurs prefer to file their own tax returns, at least in the early stages of establishment before things get too complicated.   More money for you - Because you're the sole owner of the business, you're free to decide on your salary. You're under no obligation to set aside a certain amount towards other areas of the business.   Easy to dissolve - If for whatever reason you decide that running a business is just not for you, as a sole proprietor you can readily dissolve your operations in just a few steps.   Disadvantages of choosing sole proprietorship Decreased chances of funding - In order for banks to offer you a loan, they need to be satisfied that you have sufficient assets to cover the value of the loan in case of any problems with repayments.   Unable to split equity - This inability to split equity is what prevents many sole proprietorships from securing investor funding. Investors almost always want a slice of the pie in exchange for their investment.   Greater risk - The main disadvantage of a sole proprietor setup is that it poses the greatest risk to your possessions (and therefore your family). Partnership structure   If you want to start a business with one or more partners, a business partnership is the simplest business structure that can accommodate this.   The structure of a partnership is very similar to that of a sole proprietor in that you don't have a separate tax return and you have free access to all the after tax profits.   In a partnership, each partner's personal assets are also tied to the business, but the level of liability of each partner depends on how much of the business they own.   General partnership A general partnership structure equally distributes the unlimited liability of the business across all members.    So each member is equally liable for any loss and damage as they would be in a sole proprietorship scenario.   Limited liability partnership In a limited liability partnership, the personal assets of business owners are protected from business responsibilities.   Advantages of a partnership structure   If you're planning to start a business with multiple parties it may be tempting to settle with a partnership structure due to its simplicity.    Quick to implement - Just like a sole proprietorship, partnership structures are reasonably quick to implement. There's a lot less paperwork involved compared to other, more complex structures.   Uninhibited access to profits - Just like a sole proprietorship, a business partnership structure, all parties have access to as much of the business profits as they please, within their designated percentage share.   Partners share debt burden - In a partnership structure, each member bears the burden of any losses and debts that the business may encounter. This makes the prospect of high liability much less scary in comparison to a sole proprietorship.   You have the support of others - Working together with partners also means you can share the workload of establishing a business.   Disadvantages of a partnership structure   High liability - Even though the burden of any liability is distributed among all partners, you could still suffer extensive personal losses if your business goes under.   Decreased chances of funding - Banks may find the unlimited liability component a risk to their loan security and investors might be reluctant to invest in an entity that cannot supply them with a formal share document.   Limited liability partners have little jurisdiction - As tempting as it might be to settle for a limited liability status, these members have little authority to make decisions.   Limited life - Should any of the members of the partnership die or withdraw, a new partnership will need to be formed comprising the remaining members. Partnership structure   If you want to start a business with one or more partners, a business partnership is the simplest business structure that can accommodate this.   The structure of a partnership is very similar to that of a sole proprietor in that you don't have a separate tax return and you have free access to all the after tax profits.   In a partnership, each partner's personal assets are also tied to the business, but the level of liability of each partner depends on how much of the business they own.   General partnership A general partnership structure equally distributes the unlimited liability of the business across all members.    So each member is equally liable for any loss and damage as they would be in a sole proprietorship scenario.   Limited liability partnership In a limited liability partnership, the personal assets of business owners are protected from business responsibilities.   Advantages of a partnership structure   If you're planning to start a business with multiple parties it may be tempting to settle with a partnership structure due to its simplicity.    Quick to implement - Just like a sole proprietorship, partnership structures are reasonably quick to implement. There's a lot less paperwork involved compared to other, more complex structures.   Uninhibited access to profits - Just like a sole proprietorship, a business partnership structure, all parties have access to as much of the business profits as they please, within their designated percentage share.   Partners share debt burden - In a partnership structure, each member bears the burden of any losses and debts that the business may encounter. This makes the prospect of high liability much less scary in comparison to a sole proprietorship.   You have the support of others - Working together with partners also means you can share the workload of establishing a business.   Disadvantages of a partnership structure   High liability - Even though the burden of any liability is distributed among all partners, you could still suffer extensive personal losses if your business goes under.   Decreased chances of funding - Banks may find the unlimited liability component a risk to their loan security and investors might be reluctant to invest in an entity that cannot supply them with a formal share document.   Limited liability partners have little jurisdiction - As tempting as it might be to settle for a limited liability status, these members have little authority to make decisions.   Limited life - Should any of the members of the partnership die or withdraw, a new partnership will need to be formed comprising the remaining members. Limited liability company (LLC)   If you want to completely separate your personal assets from your business security, a limited liability company is the safest option to choose. An LLC is the simplest structure that achieves an incorporated status. All other variations of corporations are also incorporated companies.   Advantages of an LLC structure   Superior asset protection - If an LLC business is being sued its structure protects the personal assets of the business owners. In fact, an LLC structure offers the best protection for your business assets compared to all other business structures.   Simpler tax returns - Members are required to submit only one tax return so profits are only taxed once.   You can start an LLC alone - You don't require multiple business partners in order to launch a limited liability company. You can be the only business owner if you wish.   Lean startup costs - Though the cost of establishing a limited liability company varies from state to state, these costs are relatively light and affordable.   Disadvantages of an LCC structure   Negligence could lead to asset loss - Even though an LLC structure provides superior asset protection, this protection is forfeited if any negligence is detected. Some examples of negligence are: Using company funds for personal use Engaging in fraudulent behavior Not exercising proper control of the company   Taxed as self-employed - Since all members of an LLC are classified as being self-employed, they're responsible for paying their own social security taxes and medicare taxes.   Ongoing annual fees - There are ongoing annual fees that need to be paid in order to maintain an LLC.   Difficult to raise money - Just like sole properties and partnerships, LLC's cannot issue shares to investors. This makes it much more difficult to secure investor funding.   Limited life - Since all members of an LLC are classified as being one entity with the business, if any of the members withdraw either willingly or due to death, the business is dissolved. Limited liability company (LLC)   If you want to completely separate your personal assets from your business security, a limited liability company is the safest option to choose. An LLC is the simplest structure that achieves an incorporated status. All other variations of corporations are also incorporated companies.   Advantages of an LLC structure   Superior asset protection - If an LLC business is being sued its structure protects the personal assets of the business owners. In fact, an LLC structure offers the best protection for your business assets compared to all other business structures.   Simpler tax returns - Members are required to submit only one tax return so profits are only taxed once.   You can start an LLC alone - You don't require multiple business partners in order to launch a limited liability company. You can be the only business owner if you wish.   Lean startup costs - Though the cost of establishing a limited liability company varies from state to state, these costs are relatively light and affordable.   Disadvantages of an LCC structure   Negligence could lead to asset loss - Even though an LLC structure provides superior asset protection, this protection is forfeited if any negligence is detected. Some examples of negligence are: Using company funds for personal use Engaging in fraudulent behavior Not exercising proper control of the company   Taxed as self-employed - Since all members of an LLC are classified as being self-employed, they're responsible for paying their own social security taxes and medicare taxes.   Ongoing annual fees - There are ongoing annual fees that need to be paid in order to maintain an LLC.   Difficult to raise money - Just like sole properties and partnerships, LLC's cannot issue shares to investors. This makes it much more difficult to secure investor funding.   Limited life - Since all members of an LLC are classified as being one entity with the business, if any of the members withdraw either willingly or due to death, the business is dissolved. Corporations   There are four different types of corporations : C-corp, S-corp, B-corp and nonprofit.   C-corp   A C-corp protects the liabilities of its members by standing as its own legal entity. This means that only the corporation is held liable for any losses. The main benefit of a C-corp structure is its ability to legally distribute shares to investors, which makes funding much simpler to obtain than it is for the lower business structures.   Advantages of a C-corporation   Asset protection - C-corporations offer a superior level of personal asset protection in the instance of a lawsuit.   Easier to secure funding - Since corporations can issue a legal share certificate to their investors, it's much easier to secure funding with these structures.   Owners are separate entities to the company -  Such clear segregation is what keeps personal assets safe from business liabilities.   Unlimited life - Since corporations are categorized as independent entities from their members, if any of its owners withdraw or die the company will still remain in operation.   Disadvantages of a C-corporation   Complicated on-boarding process - The on-boarding process of corporations can be quite overwhelming. Members need to provide highly detailed reports about the structure of the prospective company.   Some examples of the types of details required in these reports are: Comprehensive break down of share distribution amongst members Board of directors Official corporate strategy Schedule of formal meetings for shareholders Formal decision making process for all major scenarios   Twice the tax - This is probably the main drawback of C-corp structures. Members are taxed twice, once at the corporate level and again at a personal level after receiving profit dividends.   Expensive - C-corporations are expensive to establish. The cost varies at a state level, you could find yourself paying $1,000 or more.   S-corp   This variation of the corporate structure was put in place to bypass the double taxation issue.    Not everyone can choose an S-corp structure. The IRS has laid out a specific set of requirements that must be met before submitting an application for this business type.   Some of these requirements are listed below: Shareholders must be U.S citizens. No more than 100 shareholders. Not be categorised as an ineligible entity, such as a financial institution, insurance companies and a domestic international sales company.    B-corp   A B-corp (benefit corporation) is a for-profit version of a non-profit. B-corporations operate on a for-profit basis while at the same time exercising a charitable outreach. So if you have a charitable heart and you want access to company profits, a benefit corporation structure is a great option.   Advantages of a B-corporation Personal satisfaction - The personal satisfaction B-corp owners feel when they see firsthand how those in need have benefited from their efforts is sometimes a lot more rewarding than seeing profit margins rise.   A sense of community - When you start a B-corp you join a community of like-minded businesses owners who are also on a mission of a difference while making a profit. B-lab is the certifying body that regulates benefit corporations and also encourages collaboration and inspiration between b-corp companies.    More media exposure and more customers -  A major benefit of being a B-corp is that others want to hear about your charitable activities. This can lead to a high number of interview requests and public relations opportunities.   This is an advantage your business will have over your competitors. If a customer has the choice of purchasing the same product from a competitor that isn't a B-corp, they're more likely to choose you because of your charitable impact.   Disadvantages of a B-corporation   Taxed twice - Benefit corporations are taxed the same way that c-corpoations are taxed, both at a corporate level and again at the personal level when you receive company profits.   More paperwork - B-corps are required to complete a benefit report to inform the public of all of their charitable activities performed in that particular year.   Nonprofit business structures   The primary goal of a nonprofit organization is to benefit the public through charitable work. As the name suggests, nonprofits are not driven by profits. In a conventional business structure, all profits can be funneled to members. In a nonprofit structure, all profits must be funneled back into the company to further fuel its work.   Advantages of a nonprofit   Personal satisfaction - Just like benefit corporations, nonprofit owners have the satisfaction of knowing that their corporate efforts are resulting in the needy being helped.   Less taxes - Nonprofits are exempt from income tax, so more of the money can be funneled back into the organization to further power its social impact.   Eternal life - Nonprofits can still remain in operation even after their members withdraw. This seamless restructuring of management is one of the benefits of a business that's classified as a separate entity to its members.   Liability protection - Owners of nonprofits are not personally liable to any debts or losses associated with the company.   Grant eligibility - Nonprofits are eligible to receive grants from the government to fund their operations.   Disadvantages of a nonprofit   Costly and time-consuming start up - A lot of paperwork needs to be submitted in order to convince the IRS that your organization will be operating with a community-centric purpose and therefore should be exempt from taxes.   Difficult to get funding - There are limited grants available for nonprofits and almost every nonprofit in the country is competing for them, so the odds of securing one are not very high.   Strict yearly reporting - Just like B-corps, nonprofits are required to keep the public informed of their charitable efforts by releasing an annual report. Anyone can scrutinise the operations of a nonprofit and demand to see a report of their activities at any time.   Conclusion    The structure you choose for your business depends on the level of risk your operations pose to your clients. If the threat of a possible lawsuit keeps you up at night, you should start with an LLC or a corporation structure. The comforting thing about choosing a simple business structure is that you always have the option of upgrading at any time.   And always remember, the information contained in this email is in no way legal, financial or tax advice. Please check the relevant legal, financial or tax departments within your local area before making any decisions. Corporations   There are four different types of corporations : C-corp, S-corp, B-corp and nonprofit.   C-corp   A C-corp protects the liabilities of its members by standing as its own legal entity. This means that only the corporation is held liable for any losses. The main benefit of a C-corp structure is its ability to legally distribute shares to investors, which makes funding much simpler to obtain than it is for the lower business structures.   Advantages of a C-corporation   Asset protection - C-corporations offer a superior level of personal asset protection in the instance of a lawsuit.   Easier to secure funding - Since corporations can issue a legal share certificate to their investors, it's much easier to secure funding with these structures.   Owners are separate entities to the company -  Such clear segregation is what keeps personal assets safe from business liabilities.   Unlimited life - Since corporations are categorized as independent entities from their members, if any of its owners withdraw or die the company will still remain in operation.   Disadvantages of a C-corporation   Complicated on-boarding process - The on-boarding process of corporations can be quite overwhelming. Members need to provide highly detailed reports about the structure of the prospective company.   Some examples of the types of details required in these reports are: Comprehensive break down of share distribution amongst members Board of directors Official corporate strategy Schedule of formal meetings for shareholders Formal decision making process for all major scenarios   Twice the tax - This is probably the main drawback of C-corp structures. Members are taxed twice, once at the corporate level and again at a personal level after receiving profit dividends.   Expensive - C-corporations are expensive to establish. The cost varies at a state level, you could find yourself paying $1,000 or more.   S-corp   This variation of the corporate structure was put in place to bypass the double taxation issue.    Not everyone can choose an S-corp structure. The IRS has laid out a specific set of requirements that must be met before submitting an application for this business type.   Some of these requirements are listed below: Shareholders must be U.S citizens. No more than 100 shareholders. Not be categorised as an ineligible entity, such as a financial institution, insurance companies and a domestic international sales company.    B-corp   A B-corp (benefit corporation) is a for-profit version of a non-profit. B-corporations operate on a for-profit basis while at the same time exercising a charitable outreach. So if you have a charitable heart and you want access to company profits, a benefit corporation structure is a great option.   Advantages of a B-corporation Personal satisfaction - The personal satisfaction B-corp owners feel when they see firsthand how those in need have benefited from their efforts is sometimes a lot more rewarding than seeing profit margins rise.   A sense of community - When you start a B-corp you join a community of like-minded businesses owners who are also on a mission of a difference while making a profit. B-lab is the certifying body that regulates benefit corporations and also encourages collaboration and inspiration between b-corp companies.    More media exposure and more customers -  A major benefit of being a B-corp is that others want to hear about your charitable activities. This can lead to a high number of interview requests and public relations opportunities.   This is an advantage your business will have over your competitors. If a customer has the choice of purchasing the same product from a competitor that isn't a B-corp, they're more likely to choose you because of your charitable impact.   Disadvantages of a B-corporation   Taxed twice - Benefit corporations are taxed the same way that c-corpoations are taxed, both at a corporate level and again at the personal level when you receive company profits.   More paperwork - B-corps are required to complete a benefit report to inform the public of all of their charitable activities performed in that particular year.   Nonprofit business structures   The primary goal of a nonprofit organization is to benefit the public through charitable work. As the name suggests, nonprofits are not driven by profits. In a conventional business structure, all profits can be funneled to members. In a nonprofit structure, all profits must be funneled back into the company to further fuel its work.   Advantages of a nonprofit   Personal satisfaction - Just like benefit corporations, nonprofit owners have the satisfaction of knowing that their corporate efforts are resulting in the needy being helped.   Less taxes - Nonprofits are exempt from income tax, so more of the money can be funneled back into the organization to further power its social impact.   Eternal life - Nonprofits can still remain in operation even after their members withdraw. This seamless restructuring of management is one of the benefits of a business that's classified as a separate entity to its members.   Liability protection - Owners of nonprofits are not personally liable to any debts or losses associated with the company.   Grant eligibility - Nonprofits are eligible to receive grants from the government to fund their operations.   Disadvantages of a nonprofit   Costly and time-consuming start up - A lot of paperwork needs to be submitted in order to convince the IRS that your organization will be operating with a community-centric purpose and therefore should be exempt from taxes.   Difficult to get funding - There are limited grants available for nonprofits and almost every nonprofit in the country is competing for them, so the odds of securing one are not very high.   Strict yearly reporting - Just like B-corps, nonprofits are required to keep the public informed of their charitable efforts by releasing an annual report. Anyone can scrutinise the operations of a nonprofit and demand to see a report of their activities at any time.   Conclusion    The structure you choose for your business depends on the level of risk your operations pose to your clients. If the threat of a possible lawsuit keeps you up at night, you should start with an LLC or a corporation structure. The comforting thing about choosing a simple business structure is that you always have the option of upgrading at any time.   And always remember, the information contained in this email is in no way legal, financial or tax advice. Please check the relevant legal, financial or tax departments within your local area before making any decisions. Need help choosing how to best structure your business? Then hire an expert business consultant for advice on which option is best for you! Need help choosing how to best structure your business? Then hire an expert business consultant for advice on which option is best for you! 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