You have finally decided that now is the time to start your own business.  You have adjusted your mindset, found your passion/purpose, and you are now in the planning phase. If you took the advice from my last article, Entrepreneurship 101, you are probably seeking the advice of an accountant, financial advisor, and/or business attorney to get the ball rolling.

One of the most common questions that comes up at this phase of planning is “what kind of business structure should I have?” There are several structures from which to choose, and each one depends on the particular needs of your business. Do you want your business to grow into a huge enterprise? Do you want a general storefront type of business? Is your business merely a hobby that brings in a little extra income? The answers to these questions lie within the following categories.

Sole Proprietorship

• Easiest and most common business structure
• Unincorporated business owned by one individual
• Pros – owner is entitled to all profits from business activities and tax preparation is easy
• Cons – owner is personally liable for all business debts, losses and liabilities
• No legal action required for formation
• Perfect for a side hustle or hobby that generates extra income

Corporation

• Independent legal entity owned by shareholders
• Complex business structure – high administrative fees and complex tax and legal requirements
• Pros – limited liability for business actions and debts, ability to raise funds and corporate tax treatment
• Cons – costly and time consuming, some types of corporations are subject to double taxation, high level of regulation by government agencies
• Formation requires: choosing a business name, registering the Articles of Incorporation with the Secretary of State, issuing stock certificates to initial shareholders, and obtaining all necessary licenses and permits
• Perfect for conglomerates, large ventures or any business looking to eventually go public

Partnership

• Single business where 2 or more people share ownership
• Each partner contributes to all aspects of the business and shares in the profits and losses
• Pros – easy and inexpensive to form, shared financial commitment between partners and the partnership as a whole benefits as a whole from the skills and expertise of each partner
• Cons – partners are liable for their own actions as well as for those of their partners, partnership debts can be satisfied from the personal assets of all partners and there is the potential for disagreement and discord with respect to the sharing of profits and allocation of time
• Formation requires: establishing a business name, registering the business with the Secretary of State, obtaining necessary licenses and permits and creating a Partnership Agreement
• Perfect for forming a business with multiple people who possess specialized skills

Limited Liability Company

• Hybrid type of legal structure that provides the limited liability of a corporation and the tax advantages of a partnership
• Less formal and costly than a corporation but provides more protection than a partnership
• Pros – limited liability for business activities, less record keeping and less restrictions on profit sharing
• Cons – LLCs have a limited life span and members of an LLC may be required to pay self-employment tax
• Formation requires: choosing a business name, registering your Articles of Incorporation with the Secretary of State, creating an Operating Agreement, obtaining all necessary licenses and permits and publicizing the announcement of your business
• Perfect for general small businesses

“Doing Business As” (DBA)

• DBA is a fictitious name that is different from your personal name (in the case of a sole proprietorship) or from your legally registered name (in the case of a corporation, partnership or LLC)
• Some states require registration of your DBA name, others do not

Regardless of which structure you choose, you should always consult your local attorney and accountant to obtain all necessary information. Choose an attorney and accountant that are well versed in your field of interest. Meet with them in person in order to assess their skills, business acumen and understanding of your particular situation and needs.

*This article in no way, shape or form constitutes legal advice of any kind. For more information consult your local attorney or contact me at [email protected]*