Over the course of running your business from day to day, I’d imagine that examining the merits of your company’s business-entity structure rarely makes it to the top of your to-do list. And yet, the truth is your business’ legal structure can weigh pretty heavily on your financial future. It can affect everything from liability issues to tax bills and even financing opportunities.
If you suspect your current structure isn’t meeting your needs, you owe it to yourself to look into the options. And if you’re reading this, you’ve probably already chosen a business structure at least once in your life. Even so, it’s worth reviewing the five primary structures before we dig into why you might want to change things up.
- Sole Proprietorship: This is the most basic business entity, designed for one-person operators who don’t plan to take on fixed assets or hire employees. The sole proprietorship makes no distinction between the individual and the business entity for legal or tax purposes.
- Partnership: Defined as a single business in which two or more individuals are owners, partnerships can be structured as a general partnership, limited partnership or a joint venture. They’re essentially the multiple-owner version of a sole proprietorship. Taxes and potential liability pass through the business to the individual owners.
- Limited Liability Company: A hybrid of corporate and noncorporate business structures, LLCs offer the legal-liability protections of a corporation combined with the flexibility and tax simplicity of a sole proprietorship or partnership. For tax purposes, you can choose to establish your limited-liability entity as a single-member Limited Liability Company, a Limited Liability Partnership or a Limited Liability Corporation.
- C Corporation: C Corporations are separate legal entities owned by shareholders. This structure removes the business’ founders from legal and monetary liability. Forming a corporation is paperwork-intensive and creates complicated tax issues, so it’s most often used by companies with large-scale growth aspirations.
- S Corporation: Structurally similar to traditional C Corps, S Corporations often are chosen by business owners who wish to avoid double taxation when removing profits from the business. That’s because S Corps allow profits and losses to be “passed through” to the owner’s personal tax returns, circumventing the need for complex dividend filings.
As you re-read these descriptions, does one, in particular, stand out as the obvious choice for you? If so, does that seemingly clear winner match your current business structure?
No? Before you fall prey to the grass-is-greener syndrome, stop to consider whether there are compelling reasons to stay put. Each structure has its pros and cons. Changing your business entity can be a complex process, so it’s critical to keep your focus on the long-term implications — not just the short-term benefits.