You’ve decided to take your hobby and turn it to a business, and you have so many questions. Everyone suggests creating an LLC (limited liability company), but how do you know if that is the right way to go? Keep reading to learn about the different types of business structures and what is right for you. (Please note I am not a tax professional nor am I providing any legal advice)
The business structure dictates your day-to-day operations, how taxes are filed along with what you may be personally responsible for. The next few paragraphs will give you a break down on the different structures and what’s entailed in each structure. I also created a graph to give you a simple view also.
Compare Business Structures
Here are some general traits to some of these business structures, but be mindful ownership rules, liability, taxes, and filing requirements for each business structure can vary by state.
Sole proprietorship
A sole proprietorship is easy to form and gives you complete control of your business. If you are currently doing business activities you are considered a sole proprietor as long as you are not registered under an entity. Your business assets are not separate from your personal assets and liabilities. This can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business
Partnership
Partnerships are the simplest structure for two or more people to own a business together. Partnerships can be good for businesses with multiple owners, such as attorneys or doctors. Common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP).
Limited liability company (LLC)
An LLC lets you take advantage of the benefits of both the corporation and partnership business structures.
Corporations
A corporation, sometimes called a C Corp, is a legal entity that’s separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable. Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures.
S Corp- An S corporation, sometimes called an S corp, is a special type of corporation. S corps must file with the IRS to get S corp status, a different process from registering with their state. There are special limits on S corps. S corps can’t have more than 100 shareholders, and all shareholders must be U.S. citizens. You’ll still have to follow the strict filing and operational processes of a C corp. S corps can be a good choice for a businesses that would otherwise be a C corp, but meet the criteria to file for an S corp.
B Corp
A benefit corporation or B corp is driven by both mission and profit. The B corps is different from C corps in purpose, accountability, and transparency, but taxed the same.
Close Corporation
Close corporations resemble B corps but have a less traditional corporate structure.
Nonprofit Corporation (501)(c)(3)
Nonprofit corporations are for the benefit of the public. They fall under the categories of charity, education, religious, literary, and scientific work. Non-profit organizations don’t pay state or federal income taxes on any profits it makes. Nonprofits must file with the IRS to get tax exemption, a different process from state filings.
Cooperative
A cooperative is a business or organization owned by and operated for the benefit of those using its services. An elected board of directors and officers run the cooperative while regular members have voting power to control the direction of the cooperative.
I hope you found this information useful and if you have any questions, drop me a line.
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