One of the first — and most important — decisions you’ll make as a small business owner is choosing your business structure. Your choice impacts everything from taxes to personal liability, and even your insurance needs. We’ll walk you through the most common business structures, explore their pros and cons, and help you to determine the best fit for your new venture. However, we recommend getting professional advice if you have questions.
Sole Proprietorship
A Sole Proprietorship is the most simple and common business structure, especially for those who are just starting out. With this structure, there’s no legal separation between you and your business — you are your business.
Pros:
- Simplicity: Starting as a Sole Proprietorship is fast and inexpensive, allowing you to launch a new business with minimal paperwork and hassle.
- Fewer Taxes: Your business income is taxed directly on your personal income tax return, avoiding corporate taxes.
- Full Control: You make all the decisions and keep all the profits.
Cons:
- Higher risk: A Sole Proprietorship offers you no protection — you are personally responsible for all debts and liabilities. And if your business is sued, your personal assets — home, cars, and bank accounts — could be at risk.
- Limited Growth Potential: Securing investors or expanding your business without creating a formal business entity such as an LLC can be more challenging.
This helpful guide offers more details on starting your business as a Sole Proprietorship.
Corporation
A Corporation is a more complex business structure designed for larger businesses — think IBM, Apple, Microsoft. This legal entity separates the business from its owners, offering significant liability protection.
Pros:
- Lower risk: Owners are not personally responsible for the company’s debts or legal liabilities.
- Access to Capital: Corporations can raise money by issuing shares of stock.
Cons:
- Complex and Expensive: Corporations require much more paperwork, including forming a board of directors, issuing shares, and maintaining annual reports.
- Double Taxation: A corporation must pay federal taxes, and the owners must also pay personal income taxes on dividends.
Limited Liability Company
A Limited Liability Company (LLC) combines the simplicity of a Sole Proprietorship with the liability protection of a Corporation, making it a popular choice for small business owners.
Pros:
- Liability Protection: As the name suggests, an LLC shields your personal assets, such as your car and home, from your business liabilities.
- Simplified Taxation: Like a Sole Proprietorship, business income is reported on your personal tax return only, avoiding double taxation.
- Flexibility: LLCs have far fewer legal requirements than Corporations and can be managed by one person or multiple members.
Cons:
- Start-up Costs: Forming an LLC involves state filing fees, which vary by state.
- Ongoing Maintenance: While simpler than a Corporation, LLCs still require periodic filings and may require annual fees to remain compliant.
Check out these insightful articles to learn how to start an LLC and how it compares to a Sole Proprietorship.
How to Choose the Right Structure
- Sole Proprietorships are ideal for solo entrepreneurs testing a business idea with low liability risks.
- Corporations are best for larger businesses or those planning to raise significant capital through investors.
- LLCs are a great middle-ground for small business owners seeking liability protection with less paperwork and fees.
Protecting Your Business with Insurance
No matter which business structure you choose, business insurance can protect your hard work when the unexpected happens. For example, a plumber with general liability insurance might pay only a small deductible to cover damages from a costly mistake. A tax accountant with professional liability insurance could avoid significant out-of-pocket legal fees if a client sues over an error on their income tax forms. Or what if your employee gets hurt? Workers’ compensation insurance can protect you and your business if an employee gets injured on the job.
Choosing the ideal business structure depends on your goals and risk tolerance. And while LLCs and Corporations offer some personal liability protection, your business still faces risks. At Simply Business, we’re here to help you find the right coverage for your business. Let’s handle the details so you can focus on what you do best — growing your business.