You’re starting a business! Now, what type of business are your starting? Are you a one-woman operation? Do you have partners? Do you hire freelancers and contractors to do work for your company?

Answering these questions will help you determine the legal structure of your business and keep you not only in compliance with the law, but it will help you plan for future growth. This is step 5. If you’d like to start from the beginning, start with step 1 HERE.

The U.S. Small Business Administration has released a great guide appropriately titled, “Choose a business structure.”

According to SBA, “The business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits.”

Below is a graph of the common business entities, but don’t get scared, I’ll summarize after the jump.

Graph Choice of Business Entity:

 

SOLE PROPRIETORSHIP: Many businesses start out as a sole proprietorship and then evolve into more complicated business entities. If you are doing business, even if you are not registered, you are automatically considered a sole proprietorship. Also in a sole proprietorship, you are personally liable for the debts and obligations of the business.

PARTNERSHIP: In a partnership, two or more people own a business together. Most of the time, one person in the agreement had unlimited liability while the other partners have limited liability. A partnership is great for a small business that has few employees and very little need for a management structure.

LIMITED LIABILITY COMPANY (LLC):  An LLC is a great solution for small businesses because it provides protection from personal liability. Your business is a completely separate entity. While this means that all income from the business is subject to employment taxes, it also means that business debt is separate from your personal debt.

CORPORATION (CORP): Forming a corporation is the most legally complicated business structure. It also provides the most protection for the business owners, shareholders, customers, and debt holders. A corporation is a separate entity from its owners and it has rights granted by the legal system. There are many types of corporations, follow this link back to the SBA for more info: https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

Which type of business are you? You are now ready to create the business structure needed to bring your business to life. We really like the SBA’s website, which has a very informative guide to determining your business structure. In Step 6, we’ll show you how to register your business name. Until then, enjoy your business success!

Jump back to Step 1 HERE.

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