You’ve come up with an idea for your business, set up a plan, and determined who you want to include in it along the way. So, what’s next? How do you officially tell the world you’re open for business? You start with telling the government by filing through the Secretary of State.
Each business structure has a different way of signaling when business operations have begun, which is what establishes it in the eyes of the law. It’s important to know which business structure you are using, in order to know what you have to file or complete on your part to make sure that it has been properly established.
Sole Proprietorship
If you are the only person in your business, you are forming what is called a sole proprietorship. This means that:
Pros
- All you have to do is start your operations for your business to be established – no filing any forms or paying any fees
- You are in charge of all business decisions
- You get to hold onto all of the profits from the business
Cons
- You hold all the liability for anything related to the business’s activities
- You take on all the costs for the business to operate
- It can be challenging to raise money when working alone
Limited Liability Companies
If there is more than one person in your business, one common structure available to you is called a limited liability company, which can come in the form of a single-member LLC or a multi-member LLC.
Single-Member LLCs vs.Multi-Member LLCs
Single-member LLCs have one single owner who retains full control over the company, while multi-member LLCs have two or more owners who share control over the company.
Pros
- Do not pay business income taxes, just report their share of the partnership’s income and losses on their personal tax return
- Members are protected up to a certain point if the company is in debt or goes bankrupt
- Flexibility in paperwork and lower filing costs
Cons
- LLC members cannot pay themselves wages or salary, unless they are actively working in the business
- Challenges raising capital, less reputation or credibility than corporations
- More people can bring more challenges making decisions
General Partnerships
If there are two or more people in your business, one common structure available to you is called a general partnership. This means that:
Pros
- Similar to a sole proprietorship, all you have to do is start your operations for your business to be established
- Do not pay business income taxes, just report their share of the partnership’s income and losses on their personal tax return
- Shared liability and risk, shared burden of decision-making
Cons
- Lack of structure can make it hard to manage organization of roles and responsibilities
- Little protection can also lead to more personal liability related to business activities
- Shared profits from business activities among the partners
Limited Partnerships
If there are two or more people in your business, another common structure available to you is called a limited partnership. This means that:
Pros
- Only liable up to the amount of their investment
- Shared responsibility of work and burden of decision-making
- More opportunities for higher capital amount and higher investment
Cons
- Potential for disagreement and subsequent challenges in decision-making
- Less input than general partners, as general partners may have greater likelihood of liability
Corporations
If there is more than one person in your business, another common structure available to you is a corporation. This means that:
Pros
- Because the corporation is a separate entity from you, you hold limited liability over the business’s activities
- You can offer shareholders protection from creditors, as well as stock and stock options to your employees
- Corporations have established power structures that clearly define roles and responsibilities
Cons
- You are subject to double taxation, as the corporation is taxed on its earnings
- You must file with the Secretary of State and pay fees
- You must file your own income taxes and your business taxes, separately
Professional LLCs and Corporations
If there is more than one person in your business, one more common structure available to you is a professional LLC or corporation. This means that:
Pros
- Shareholders and members are protected from personal liability in case the business has debts or goes bankrupt
- Protection for individual members from liability for malpractice of fellow members
- Have flexibility for taxation purposes
Cons
- Some states do not recognize either business structure as a legal business structure
- Could find themselves limited to only certain licensed professions
- Could have heavy taxation implications for members and more paperwork
For questions regarding which business structure you should adopt, what you need for each one, and how you can protect yourself in the process, make sure you find a trusted attorney to guide you through those questions and answer them for you, so you can start your business operations as soon as possible.