For entrepreneurs – ranging from web developers to web designers – officially launching a new business often starts with deciding on the right type of business structure. Choosing a structure for a business is a complex process, with many different options. However, considering that small businesses create millions more jobs and opportunities than large corporations ever do, it’s something all business owners go through at one point or another.
Two of the most popular choices are sole proprietorships and limited liability companies (LLCs). This guide will explain why forming an LLC is an excellent choice for many small businesses, as well as summarizing other business structures available to entrepreneurs.
LLCs and Other Business Structures
A limited liability company (LLC) is a business structure that reduces the liabilities of the owners, while also providing the tax advantages of a partnership. An LLC is formed by filing the Articles of Organization document with the relevant state's Secretary of State office. An LLC is a separate legal entity that does not pay taxes itself and instead transfers profits and losses to the owners, who are known as members. The members of an LLC are not personally liable for any debts the business may incur, which makes LLCs an attractive option for entrepreneurs looking to protect their personal assets.
A sole proprietorship is a business owned by a single individual and is often the easiest to get started. Generally, no special paperwork or registration is required to set up a sole proprietorship. It is also the least expensive business structure to form. Unfortunately, sole proprietors also have the greatest level of personal liability for the debts of the business.
The corporate structure is popular with large and publicly-traded companies. Corporations are separate legal entities and shareholders are not personally liable for the debts of the corporation. There are two types of corporations; “C” corporations and “S” corporations. C corporations are taxed separately from the shareholders at a corporate tax rate, while S corporations have pass-through taxation, meaning the income and losses are passed through to the shareholders.
Partnerships are good for businesses that have multiple owners. It is relatively easy to set up as neither federal nor state filing is required. The profit and losses are shared among the partners and the individual partners are personally liable for the debts of the business.
Cooperatives are similar to corporations but the ownership is shared among a group of individuals. This type of business structure is common among farmer's markets and other community-based enterprises.
Forming an LLC is a great way to protect a small business and its owners from personal liability and can provide tax advantages. LLCs can be set up quickly and can easily be accessed online. For companies that require more intricate structures or have a higher potential for risk, forming different types of business structures such as corporations, partnerships, and cooperatives may be the better option.
No matter which business structure is chosen, entrepreneurs should always consult with an experienced legal or business advisor to ensure their chosen structure aligns with their business goals.
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