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Startup Essentials Series: Choosing a Business Structure

EDITOR’S NOTE: This is the first installation of a multi-post series dealing with decisions and tasks startup businesses face when getting off the ground.

When your small business was just a thought in your head, you probably fantasized about some of the more entertaining aspects of starting your own company: Coming up with a name, logo, brand colors and office design. But you probably didn’t fantasize about choosing a business structure.

The bad news is, this mundane decision is one of the most important choices you’ll make for your company. Your choice will determine what paperwork you’ll file and what taxes you’ll pay, among other things.

The good news is, you essentially control your own fate – by understanding the choices available to you, you can decide on a business structure that’s most beneficial to you and the growth of your company going forward.

The following are some of the most common business structures, and why they might or might not be right for you.

Types of Corporate Structures

Sole Proprietorship: This is the easiest corporate structure in existence, because when you start up your new company, a sole proprietorship is the default. This type of business structure is designed for individuals, and taxes are simply filed as part of your own personal return. The downside is that you’re tethered to your business for better or worse, which means there’s no protections should your business go under with debts still to pay – your personal assets can be used to make debtors whole.

Partnership: Just like a sole proprietorship is for a sole owner, a partnership is a team effort – again, for better or for worse. Sole proprietorships and partnerships both have what’s referred to as “pass-through” taxation, where taxes are simply paid via the personal income tax returns. Also, partners are on the line in that personal assets in a worst-scenario of having to pay more debts than the business itself can cover. And, of course, partners can have varying levels of say in company matters (depending on which type of partnership you establish), which means decision-making can turn into an ordeal.

LLCs: If the idea of having your personal assets tossed to the wolves is too much to bear, the limited liability company (LLC) is probably much more your speed. The biggest difference, as the name implies, is that there’s actually personal liability protection for its owners. But there are downsides. For instance, certain professionals (such as lawyers or engineers) can’t establish LLCs, and those who can will face higher setup expenses and more paperwork. Like the other two structures, however, limited liability corporations also are pass-through entities for tax purposes.

Corporations: Corporations, such as C corps and S corps, are similar to LLCs in that owners’ assets are typically protected from worst-case scenarios. They make access to capital much easier, in that they can do things such as create stock, and they also live on after death – if the owner of a corporation dies, the corporation does not dissolve. That said, corporations are also among the most complex corporate structure, typically costing more and requiring professional assistance. Corporations such as S-corps may have pass-through taxation, though C-corps are subject to “double taxation” – once at the corporate level, then also at the personal level when dividends are paid out.

This is just the view from 10,000 feet. Every type of business structure has many more intricacies that, if not understood when creating the corporate structure, could become a hindrance to owners and the business alike, and may even necessitate a restructuring down the road.

Our suggestion? Get it right the first time. McManamon & Co. offers a wide range of business consulting services, including helping you get your startup started right with the proper business structure.

Every early misstep can be magnified down the line, so make sure your formative steps are the right ones. Call McManamon & Co. at 440.892.9088 or contact us online to ensure that you pick the business structure that will work best for you and your company – now and for years to come.


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