Starting a Business in 12 Steps | ZenBusiness Inc.

7. Choose a Business Structure

Deciding on the structure of your business is an important decision for starting a business. Look at the pros and cons of each option before selecting one. The structure you choose will determine your tax liabilities, how you organize and run your business, and the amount of liability protection available to the owners.

Start a Sole proprietorship

As the name implies, in a sole-proprietorship, you are the only owner of the business. You reap all the profits and are responsible for all the business debts. In most cases, launching as a sole proprietor is quick and easy, however, as a sole proprietor you are completely liable for any losses or debts incurred by the business. 

Start a Partnership

If you have at least two people starting a company together, you can form a partnership. In a general partnership, each of the partners contribute funds to start the company, and they all share in management, profits and losses of the company. Among the disadvantages is that if one partner causes a loss or injury, all the partners are liable.

A limited liability partnership provides some liability protection to the partners by shielding them from the malpractice or wrongful actions of the other partners, though this liability protection can vary by state.

Start a Limited Liability Company (LLC)

An LLC is a form of business that combines the ease of operation of a sole proprietorship with the liability protection of a corporation. Legally, the LLC is a separate entity from the person or people who own it (the members.). The only businesses that might not be eligible in some states are professional partnerships, which would form a limited liability partnership or a professional limited liability company. Professional partnerships are businesses like a doctor’s office or law firm.

Start a C Corporation

C corporations are owned by shareholders who elect a board of directors. The board leads the decision-making. C corporations are a separate entity from the owners, protecting their liability. However, with a C corporation, the business will be taxed, and then the individual shareholders will be taxed on the income they receive (known as “double taxation”).

Start a S Corporation

An S corporation is not really a separate kind of business structure, but a tax election status. A C corporation or an LLC can apply for S corporation status with the IRS. S corporation status is often a way for C corporations to avoid double taxation because they’re taxed like a general partnership or sole proprietorship.

One reason an LLC might opt for S corporation status is that it can save the owners money on Social Security and Medicare taxes (self-employment tax) by splitting income into two groups, salary and distribution. The IRS only requires the owners of an S corporation to pay the-Social Security and Medicare tax on their salary. Distributions of profits are not subject to self-employment tax.

You don’t have to make this decision alone. We have information and resources to help you make the best decision to set up a business. Here’s more information to help you compare and choose the right business structure.