6 Types of Business Structures, Part 1

When you’re starting a new business, there are many decisions to be made. One of the most important is what structure your business will have. Nothing is set in stone, but you don’t want to have to request to change this simply because the wrong structure was selected at the start.

Below is a brief outline of the pros and cons of the different types of business structures. If you click on the headings, you’ll be directed to more information from the source: SBA.gov.

Limited Liability Company, or LLC

Pros

1. As the name suggests, you have limited liability. Members of an LLC receive protection from liability due to business actions of the LLC. There is an exception, however. Wrongful acts made by the LLC or its employees can pass the liability onto the LLC’s members.
2. LLCs are great for new businesses and first-time business owners. They’re relatively easy to obtain and typically don’t cost that much. The cost to register an LLC can vary by state so be sure to check with your state beforehand, so that you can make an informed decision.
3. Profits and losses may be distributed as members see fit, for the most part.

Cons

1. What happens if a member leaves your LLC? In most states, and in most situations, this results in dissolution of the LLC.
2. LLCs are not immune from self-employment taxes. Bear in mind that as a member of an LLC, you may be taxed for the net income of that LLC, not just your share.

Sole Proprietorship

Pros

1. It shouldn’t be too surprising that this is the easiest of the six business structures to form. It has one business owner–you. Not only is this the least expensive business structure to form, but, depending on your state, require little by the way of licensing and permits, compared to other business structures.
2. You’re in charge. You have the decision-making power and you don’t need to weigh anyone else’s decisions if you don’t want to.
3. With low tax rates (compared to other business structures) and ease of filing, you may wish to pursue a sole proprietorship if your tax burden is already on the high side.

Cons

1. When you’re the only one in charge, the buck stops with you. Everything you do as your business, or everything your employees do in regard to your business, equals personal liability that can fall on your doorstep.
2. While registration & licensing fees, as well as taxes, can be fairly low, obtaining the capital needed to start and run your sole proprietorship can be difficult. You don’t have stock to offer and credibility for loans can be more difficult to establish.

In the next two weeks, we’ll share with you the other four business structures, so please stay tuned to learn about Cooperatives, Corporations, Partnerships and S Corporations.