You’re starting your own business. You’ve got a lot on your mind – creating your product/service, marketing, location, business plan, licenses, permits, financing, and more. One of the most important things to consider before you get going, though, is your business structure.
Will you set up your business as a sole proprietorship, a partnership or LLC, or a corporation? Your business structure determines how your business taxes are levied and the tax forms you’ll need to file, and your business goals will help you choose your structure.
Sole Proprietorship – A Common, Easy Way to Go (But careful!)
As a sole proprietor, you are your business. Taxes are simpler and you pay them as an individual. You also get to keep all the profits. But sole proprietorship doesn’t protect your personal assets from business debts, lawsuits or other legal troubles related to your business.
LLCs, partnerships and corporations can separate you, the individual owner, from your business entity and provide some added protection for your personal assets. Each type of business structure has different advantages and disadvantages. Choosing the right structure for your business can save you money and legal headaches down the road. In this two-part post, we’ll share some advantages and disadvantages of each to help you decide.
Partnership vs. LLC (Limited Liability Company)
Partnerships and LLCs are generally taxed similar to a sole proprietorship. The profits/losses are passed through to the owners/partners and not taxed at the corporate level. Some states, however, may place additional taxes on an LLC. (California is one of those, for example.) A partnership has two or more owners, while an LLC can be formed by a single person or have multiple owners/members. LLCs are easy and inexpensive to set up and simple in structure. Partnerships can be a little more complicated, depending on the type of partnership (general or limited). One unique difference is that LLCs can be owned by individuals or corporations, while partnerships cannot be owned by corporations. LLCs and partnerships both must pay self-employment taxes (Social Security and Medicare) in addition to regular income taxes, so for a single-person LLC, it would be the same as for a sole proprietor. But for a multiple-person LLC or partnership, the self-employment tax is divided among the members based on each person’s share of the LLC or partnership.
For many small businesses and independent contractors, forming an LLC or partnership can give you some liability protection and may help reduce your taxes. But be sure to consult your CPA and/or legal counsel to be sure.
Our next post (Part 2) will explore LLCs vs. Corporations and C-Corps vs S-Corps.