Structuring your business is one of the first—and most important—decisions you make in your entrepreneurial journey. Your business entity impacts everything from taxes to daily operations. But if you’re just starting out, you might not know what to look for in a business structure, and that’s OK. We have your cheat sheet right here.
Choosing a business structure? Consider these four factors
First, you need to know about your options when it comes to selecting a business structure.
Here are the five IRS business entities:
- Sole proprietorship, a business owned by one person
- Partnership, owned by two or more people
- Limited liability company (LLC), owned by one or more members
- Corporation, owned by one or more people
- S corporation, owned by one or more people
With these five options to choose from, it’s important to keep the following four considerations in mind when structuring your business.
Are you going to be the only owner of your business, or are you starting it with someone else? The structures you can choose depend on this factor.
If you’re starting your business on your own, you can choose from:
- Sole proprietorship
- Single-member LLC
- S corporation
If you’re starting your business with someone else, you can choose from:
- Multi-member LLC
- S corporation
Business owners who go into business alone have more control than partners (partnerships), members (multi-member LLCs) and shareholders (corporations). Co-owners generally share control based on what’s outlined in the partnership agreement or corporate bylaws.
Long story short: Sole proprietors have complete control of their companies. If you structure as a sole proprietor, you do not need to share ownership with other partners, members or shareholders.
Limited liability protection
When deciding between business structures, also consider how important personal asset protection is to you.
Some business structures have limited liability protection, which protects your personal assets in case your company can’t pay its debts. If you choose a structure with limited liability protection, you generally only risk the amount you invested in your business if things go south.
Structures that offer limited liability include:
- Certain types of partnerships (i.e., limited partners in limited partnerships)
Structures without liability protection include:
- Sole proprietorships
- General partners in partnerships
Pass-through vs. double taxation
Again, the structure you choose determines taxation. Some business structures have pass-through taxation while others have double taxation.
In pass-through taxation, taxes “pass through” the business to the owners, who pay the taxes when they file their individual tax returns. In double taxation, the business is taxed and the owners are taxed.
The following business types offer pass-through taxation:
- Sole proprietorships
Corporations (and LLCs taxed as corporations) are considered separate legal entities. As a result, shareholders pay taxes and the corporation pays taxes.
Not all business structures cost the same. Some entities (partnerships, corporations and LLCs) require you to register with your state.
You may need to consider the following types of costs when structuring your business:
- Filing fee
- Franchise tax
- Attorney fees
- Investment opportunities
You must file articles of incorporation with your state to form a corporation, which range from $45 to $315. And if you want to structure as an LLC, you need to file articles of organization with your state, which can cost between $45 and $520. Not to mention, you may need to hire a lawyer to help you file these legal documents.
Additionally, some states charge certain business entities a franchise, or privilege, tax. Franchise taxes are taxes that corporations, partnerships and LLCs pay to conduct business in the state. Franchise taxes can typically range from $800 to $1,000.
Sole proprietorships do not need to formally register with the state to structure. However, there could still be costs associated with the structure. For example, sole proprietorships can’t sell stocks, which could make it harder to get capital (which could increase your out-of-pocket expenses). And, keep in mind that sole proprietorships will need to obtain a Federal Employer Identification Number and register with their state for employer account numbers.
There are other costs that may vary depending on a business entity, including doing business as names (DBAs) and required business licenses and permits.
One more thing: Forms and deadlines
The tax return form you use depends on the business structure you choose. And, your business tax due date varies by entity.
Forms and deadlines likely won’t factor into your business structure decision. However, you should be aware of them.
Here’s a brief rundown on the tax return form you need to file (and when it’s due) for each of the business structure types:
- Sole proprietorships and single-member LLCs: Schedule C, Profit or Loss From Business (April 15)
- Partnerships and multi-member LLCs: Form 1065, U.S. Return of Partnership Income and Schedule K-1 (March 15)
- Corporations and LLCs taxed as corporations: Form 1120, U.S. Corporation Income Tax Return (15th day of the fourth month after the end of the tax year OR the 15th day of the third month if the fiscal year ends on June 30)
- S corporation: Form 1120-S, U.S. Income Tax Return for an S corporation (15th day of the third month after the end of the tax year)
Choosing your business structure is a big decision. But by researching your options and identifying your company’s goals, the decision doesn’t have to be intimidating.