When someone is starting a business there are many things that need to be considered. One of those things is the business structure. We will discuss several of the options in this post.
The first that someone might consider is a C corporation. While this option makes sense for many large corporations, smaller businesses could find it overly complicated. This is particularly true in the context of taxation matters.
A second option is the S corporation. This is appealing to some because officers and shareholders are not personally liable for liabilities and corporate debts. In addition the self-employment tax does not apply to each person’s share of the S corp’s net income.
A limited liability corporation is appealing to some because of the protections it offers the business. In addition, it is possible to create a formal brand under this formation. There are no tax breaks associated with it however which could be a drawback.
The simplest way to operate is as a sole proprietorship. While operation and paperwork is streamlined—expenses and income are simply reported on schedule C of the 1040 form—the self-employment tax can be off-putting. In addition, an owner must take personal responsibility for the business’ liabilities.
This is just a high-level overview of a few of the business structures available. Ultimately multiple factors should be taken into consideration to determine which is best. These include the costs associated with setting up an entity, the marketing plans and goals of the business, where the business is located and conducts business, whether there is an investor or partner involved. In addition, liability exposure should be considers as well as tax planning and the amount of earnings and deductions.
Since these matters can be complicated many find it beneficial to work with a lawyer who has a thorough understanding of the options to determine the best approach.