Starting a Small Business can be exciting but also comes with some challenges. One is trying to decide which business entity is right for you. The type of entity you choose will impact various parts of your business, from the control you have as an owner and how you will be taxed.
Choosing the right entity is one of the most important decisions when starting your business as it can have a major impact on your taxes and personal liability. Here are a few of the most common small business structures:
This is the most common and simplest small business structure. You are automatically considered a sole proprietor if you are involved in any business transactions but have not set up a separate business entity.
Some examples of sole proprietors:
- Gig Workers (Uber, Lyft, Turo, 1099 contractors)
- You started making and selling products
- You started offering services to your community (such as yard word, car washes, house cleaning)
A sole proprietor is in charge of all business operations and decisions and usually operates under their own name. Sole Proprietors can choose to register a dba business name with their state if they choose.
Sole Proprietorships are suitable for low-risk businesses or businesses just starting out.
A partnership is when 2 or more people start a business together. The most common forms of partnerships are as follows:
- General Partnership:
- This is the default for when 2 or more people start a business without a defined structure. The business liability is held by all of the partners.
- Limited Partnership:
- If you want to create a partnership where some of the partners carry limited liability, you would create a limited partnership
It is recommended to have an Operating Agreement in place when creating a partnership. Some bank accounts will require this agreement before they will allow you to open an account.
Limited Liability Company (LLC)
An LLC is one of the most popular choices for small businesses. One of the reasons being that the owner/s are not personally liable for the business. Second, There is no Corporate taxation as all the profit and losses are passed through to the owner/s personal income.
An LLC can be taxed a few different ways. If the LLC has only one member/owner, than the LLC would file a SCH C, same as a sole proprietor, with their personal income.
If the LLC has 2 or more members/owners then the business would have to file a partnership return to generate K1’s for each member/owner to file with their personal tax return.
An LLC can also elect to be taxed as an S-Corp. If you have more than $60k left over in profits at the end of the year, choosing this election could save you thousands of dollars in taxes. To determine if this would be beneficial for your business, please talk to a tax professional before making the election because you can get into legal trouble and potentially owe penalties if this is not set up correctly.
Citrine Accounting & Taxes can help you determine if an S-Corp would be a good decision for your LLC. Schedule a FREE consultation to learn more.
There are a few different types of Corporations including S-Corporations and C-Corporations, which are the 2 most common corporation entities.
S-Corporations Vs C-Corporations
- Limited to 100 shareholders max
- Not personally liable for business liabilities
- Taxed Once – Only shareholders pay on profits received
- All shareholders must be US Citizens or residents
- Unlimited Shareholders
- Not personally liable for business liabilities
- Taxed twice – Business pays at the corporate level and shareholders pay on income received
- Recognized internationally
- Preferred by investors
Corporations are suitable for medium to high risk businesses looking to eventually be bought/sold, go public, or want to raise money for Capital.
Which one is right for you?
According to the Chamber of Commerce, nearly half (47.3%) of small employer businesses (businesses with 1-100 employers) are S-corporations, which is the most common type of organization for this type of business.
A whopping 86.4% of non-employer businesses are sole proprietorships, while just 14.4% of small employer businesses are sole proprietorships.
These are some questions you should be asking yourself when deciding which entity structure best fits your needs:
- Will there be more than one owner?
- Do you want to be personally liable for the business?
- How do you want to be taxed?
- How would you prefer to pay yourself?
- Do you want to maintain control over your business? If yes, How much?
- Do you plan on selling your business or going public?
Choosing the best entity structure for your small business can be challenging. Citrine Accounting & Taxes LLC can help you make this decision and ensure the correct bookkeeping system is in place for you.
Contact Us at Citrine Accounting & Taxes if you need help today!