When you are starting your first business, you probably experience high levels of excitement, hopefulness and drive. You may want to hit the ground running to reap the rewards of success right away.
Such anticipation is normal and can help you get through challenging times. However, if you rush through things, you can end up making mistakes that will be difficult and costly to undo.
One of these can be choosing the wrong structure for your business. The entity you select will have a significant impact on the way you run your company, the taxes you pay and the amount of liability you face. Become familiar with the different types and then speak to an attorney and an accountant for professional advice on which structure would be best for your business.
- Sole proprietorship is the simplest business formation and can be a good starting point before diving into more complex structures. It gives you complete control but has a high risk of liability because your personal and business assets are not separate.
- Partnerships are similar to the above except involve two or more people. You can have a limited partnership that gives one person all the control and liability and the others limited control and liability, or you can have a limited liability partnership that protects everyone.
- Corporation covers several options. A C corp makes your business a completely separate entity, requires double taxation on profits and can involve stockholders. An S corp limits tax consequences but also the number of shareholders. Others in this category are B corp, close corporation and nonprofits.
- LLC, or limited liability company, combines the benefits of partnership and corporation. It allows business assets to be separate to reduce liability and has lower tax rates. However, it falls under self-employment and may require reforming when ownership changes.
Each one has its own advantages and disadvantages, so which one is right ultimately depends on the purpose of your business and on your long-term goals.