Forming a business can be overwhelming due to the crucial decisions you need to make, including choosing a business structure. Should your business be a sole proprietorship, partnership, corporation, or limited liability company (LLC)?
Here are three factors to help you make informed decisions.
What’s your budget?
Forming a business can be costly. But you can do so within your budget, provided you make the right call. Sole proprietorships are simple to establish – you form the business on your terms; you can operate online or from home/an affordable physical location. Further, you need less paperwork to set it up, as you don’t have partners or board members.
Partnerships are also easy to set up, and you have more capital for the business.
Corporations can be expensive to form because they involve more paperwork. Additionally, you have to comply with more regulations and tax requirements.
How do you want to deal with tax?
The business structure you choose determines how much you pay in taxes. Owners of sole proprietorships, most partnerships, LLCs and S corporations are taxed individually – business profits are considered personal income and taxed accordingly at the end of the year.
Corporations (except S corporations) pay income tax on their profits. Thus, profits are taxed twice – when the company makes a profit and when dividends are paid to shareholders.
Are you willing to risk your personal assets?
Personal liability is another factor to consider when choosing a business structure. You may find yourself in legal trouble in the future – an employee or a client may take legal action against you, or you may have tax or debt issues. If this happens, your personal assets may be at risk.
Sole proprietorships have the highest risk to personal assets, while corporations offer utmost protection to owners.
When forming a business, it’s vital to seek legal guidance to choose a reliable business structure.