How To Pick The Best Structure For Your Business

As you’ve probably already realized, there are lots of important decisions that need to be made when you’re in the early stages of starting a business.

One such decision involves choosing the right structure for your business. What does this mean? You’ve probably heard the terms sole proprietorship, partnership, limited liability company (LLC), and corporation thrown around before. This post will give you all the information you need about these four company types (more details about each of them here, per the IRS) so you know which one to pick for your business. This post will give you some of the information you need to make an educated choice, so let’s get started!

What’s Important for Me to Know?

When choosing a structure for your business, look at the issue from three different angles:

1) company type

2) legal type

3) tax type

Doing so will increase the chance of you selecting the right structure for your situation.

#1: Company Type

Company Types:

• Sole Proprietorship

• Partnership

• Corporation

Some important questions to answer for yourself are:

• How many owners will your business have, and who will they be?

• Will these owners be individuals or other companies?

• Do you plan to add shareholders or members in the future?

• How do you envision exiting the business?

#2: Legal Type

Legal Structures:

• Sole Proprietorship
• Partnership
• C-Corporation
• Benefit Corporation
• Limited Liability Company (LLC)
• Limited Liability Partnership (LLP)
• Professional Limited Liability Company (PLLC)
• Professional Corporation (PC)

Make sure to research all your available options before making your decision!

#3: Tax Type

The IRS will tax you according to the company and legal types you choose.

Tax Types:

• Sole Proprietorship
• Partnership
• S-Corporation
• C-Corporation
• Non-Profit Corporation

So if you decide to structure your business as an LLC, for example, you may be taxed as either a sole proprietorship or a partnership depending on how many members there are in your company. Meanwhile, if you choose to start a C corporation, you’ll be taxed as a C-corp, unless you elect to be treated as an S-corporation, in which case you’ll be taxed as an S-corp (which is very different from a C-corp).

What Other Questions Should I Consider? There are some other factors you should take into account when deciding which business structure is best for you. See below:

• How large do you plan to grow your business? Is it just going to be a small side hustle that lives and dies with you alone, or do you plan to expand it into a large company at some point? The answers to these questions impact the type of structure you should choose. While a side hustle or lifestyle business might be best as a sole proprietorship, for instance, a large company might be best structured as a corporation or LLC.

• What are your growth and exit plans for your company? Do you plan to one day take it public? This too dictates how you go about forming the business. A sole proprietorship, for example, doesn’t have the same exit options as a partnership does.

• How do you want to be taxed? In other words, do you prefer to be taxed personally for your business or as a corporation? This preference matters when you’re making your formation decision because with some legal structures you’ll be taxed personally while with others the taxation will be on a corporate level instead.

A Final Word From Tuesday Brooks Founder of AJOY

Take your time and do your research because this decision will reverberate throughout the entire life of your company. But remember that you can do this as many others have before you. Consider speaking with some professionals (namely an attorney and a tax accountant — both of whom specialize in your industry and small businesses) before making up your mind. Ask them the same exact questions so you can see how their answers differ. Obtaining both legal and financial perspectives — and then reconciling them — will provide you with amazingly helpful insights that will assist you in making this crucial decision. You’ve got this!