When you start a new business, one of the first decisions you’ll have to make is how to structure your company. This choice can be critical to the future health of your business. Taking time up front to consider the pros and cons of each possible structure will likely save you many headaches in the future. In certain cases, it can mean the difference between your business’s success or failure.
Below you’ll find the upsides and downsides to some common business structures: Sole Proprietorships, LLCs, C-corporations, and S-corporations.
Sole Proprietorship
Upside:
- Easy to Form – Sole Proprietorships are the easiest, most common, and least expensive business structure. A person is essentially a walking, talking sole proprietorship in waiting. All you need to do is sell something—a product, a service, anything—and boom … suddenly you’re a sole proprietor. Aside from obtaining any required business licenses, a Sole Proprietorship requires no paperwork and no filing fees.
- Decision Making – As suggested by the name, you are the sole decision-maker. You run your business the way you want to run your business, and you don’t have to ask permission from anybody.
- Taxes – The IRS doesn’t view your Sole Proprietorship as a separate tax entity, so there’s no special or additional tax paperwork. You’ll simply file your taxes on the same 1040 form as any other individual.
Downside:
- Liability – The lack of separation between you and your business leaves you liable for all debts and legal claims against the business. You can even be responsible for your employees’ actions (if you have employees) while they are on the job.
- Funding – Sole Proprietorships lack a specific structure for raising funds. You have no stock to sell, no set percentages to offer, and banks are often reluctant to offer loans to sole proprietors. Continue reading
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