When you are ready to start your own business, one of the most important initial decisions you will make is on what type of business structure to use. Some people bypass using a specific type of business structure because of the costs associated with setting a business up. For example, setting a business up as a corporation is significantly more expensive than creating a sole proprietorship. But if you do have a sole proprietorship, then you could lose all of your personal possessions if your business is sued.
Every entrepreneur should have a basic understanding of each business structure, and know which structure best applies to their business. Each structure is different, and they all have situations where they are the right and wrong decision.
Sole Proprietorship/Doing Business As/Partnership
Sole proprietorship, doing business as (DBA) structures, and partnerships are all slightly different, but they all share one glaring common trait. When you use these structures, you and/or your partners are personally liable for the profits, losses, and lawsuits that go with the business. If you choose this structure, it always helps to get plenty of insurance to back you up in case something happens.
A sole proprietorship is a business that is owned and operated by one person, and that person uses their name as the business name. A partnership is an officially written agreement between two or more partners to run a business and share in the profits and losses. A DBA is a structure that allows a sole proprietorship or partnership to run under a different business name. For example, John Smith would have to use a DBA structure if he wanted to call his business Dynamic Auto Parts instead of just John Smith.
Limited Liability Company (LLC)
A limited liability company (LLC) allows you or you and a group of partners to set up a business that exists as a separate legal entity. The LLC remains one of the most flexible ways to protect your assets using a business structure because there are almost no limits on how many partners you can have, what types of entities your partners can be, and where your partners can come from.
Recent law changes in many states now allow individuals to use the LLC structure. Prior to that change, only partnerships could become LLCs. The LLC still needs to identify itself as a partnership or sole proprietorship, and the personal activities of the owners of an LLC could still result in personal liability.
There are several forms of a corporation, and they each have very different rules. The basic idea behind a corporation is that the business becomes its own entity, and the business owners are protected from corporate and personal liability. Each form of incorporation has its own paperwork that needs to be filed, and there are annual filings that also need to take place every year.
In some corporation structures, there is a corporate tax along with a personal income tax for each board member. Before you decide on a corporate structure, you should consult an attorney and an accountant.
The structure you choose for your business will determine how the law regards your business, how you pay your taxes, and whether or not you are personally liable for business matters. It is best to consult with a qualified corporate attorney before deciding what type of structure you will be using.