There are a lot of things to consider when starting a business. What’s your marketing strategy? Who are your customers? How will you reach them? How will you fund your dream of being an entrepreneur? These thoughts can be overwhelming before you even consider minute details, such as how you’ll structure your business.
There are various business structures to choose from and determining which one is right for you can be a challenge. Here are the different structures to consider, and why they may or may not work for you.
Limited Liability Corporation (LLC)
A Limited Liability Corporation (LLC) is one of the most commonly used business structures today, due to its accessibility and ease of use for small business owners. With an LLC, the owner is granted a limited amount of protection from the business entity and benefits from some corporation-like tax benefits. While an LLC can be processed through the owner’s taxes during tax season, the owner is not personally responsible for debts accrued by the business, such as lawsuits.
Operationally speaking, an LLC is very similar to a sole proprietorship. In fact, for Canadian business owners, sole proprietorship is the only option in this category. When a US LLC operates in Canada, they are treated as a corporation, which can be damaging for small business owners when tax time arrives.
If you’re a single person operating a small business in the USA, an LLC is likely the best option for your needs.
Partnerships
A partnership operates similarly to an LLC or sole proprietorship, except with multiple owners rather than one single entity. During tax season, each partner is responsible for recording the business information on their personal tax returns. Other than that, partnerships operate the same as a sole proprietorship or LLC, just with an equal division of ownership and liability.
Partnerships are challenging even for longtime friends and family members, making it the wrong choice for most business owners. Partnerships often dissolve due to stress and disagreements between the parties. Equal shares in a company can make it extremely difficult to make business decisions when the partners have opposing views.
C Corporation
C Corporations tend to offer the most contrast from the other business structures considered by entrepreneurs. C Corporations are meant for larger businesses that have the intention of being publicly accessible, offering shares for sale, and operating under the guidance of a board of directors. In fact, if you have a C Corporation, you are legally required to appoint a board of directors and host an annual general meeting (AGM). You must also appoint certain positions within the company to remain compliant.
C Corporations are meant for business owners who are going big right off the bat. This is a good option if you’re looking to attract investors. The organization exists as a separate entity from its owners, offering liability protection for investors. If the business lasts for the duration of the owner’s lifetime, it will be passed on and continue to live on after the owner is gone.
S Corporation
An S Corporation is similar to a C Corporation, with different taxation rules and protocols. It is better for smaller corporations, with fewer than 100 shareholders. One of the limiting factors of an S Corporation is that all shareholders and the business itself must be contained in the United States. Therefore, you will not be able to have any foreign investors or conduct any business across borders with an S Corporation.
The main benefit of an S Corporation is that it saves you a lot of money during tax season and is built to benefit the owner more so than a C Corporation. So, if you’re ok with conducting an entirely domestic business but want to open doors to investors, this might be the option for you.
Most small business owners will opt for an LLC to best protect their assets as they pursue their business goals. If in doubt, talk to a business consultant and use your local business resources before making a decision.