There are many decisions you have to make when launching a startup. And while everyone seems to be focused on the big disruptive ideas, one area you must also consider is what kind of business entity you’ll be. This is because it could drastically affect the trajectory of your startup. For those who don’t know much about different business entities, we’ve put together a simple guide covering the top four legal business structures: sole proprietorship, partnership, limited liability company (LLC), and corporation.
Let’s start off with the simplest one on the list. To call sole proprietorship a business entity is a little tricky as your not creating a separate legal entity for your business. This means that you’re not separating yourself from your business (even if you have it under a different name).
Now, one advantage this has is simplicity. You won’t need to register it. However, you’ll still need to secure the proper licensing, permits, and other requirements deemed necessary by the state that you operate in. While this may seem like a really convenient option, you’ll have to be fully aware that you’ll be assuming all liability for your business if things go awry. All Business’ article on the advantages and disadvantages of sole proprietorship highlights how this could lead to your personal assets being seized due to any legal trouble.
A partnership isn’t too different from a sole proprietorship. It’s basically a sole proprietorship but with two or more people. One key difference though is that partnerships get to set certain degrees of partnerships.
General partnerships mean all individuals are equally involved. Limited partnerships are self-explanatory, meaning some partners’ roles will be limited according to agreed-upon stipulations. This determines the amount of liability an individual assumes but also limits the amount of control they have on the business. Establishing partnerships is also pretty simple. The only things you’ll need are the aforementioned licenses and permits involved with sole proprietorships, and to file a “Doing Business As” if your startup is going to be under a different name.
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Limited Liability Company (LLC)
If you’ve read our article on Starting a Business in Florida in 10 Quick Steps then you already know why we recommend LLCs as the best structure for your company. Think of LLCs as the middle ground between a sole proprietorship and a partnership. Not only does it provide your startup with enhanced credibility but it also protects you from being sued by providing you with personal liability protection. To top it all off, the cost for registration is only $125, which may be significant depending on the size of your current operations.
Although the process of creating an LLC differs depending on where you are (fees can range from $40 to $500), there are general steps that you will most likely encounter in the process. ZenBusiness lists the steps for forming LLCs, which starts with naming your company. From there all you’ll need to do is to file the articles of organization, create the operating agreement, and apply for an IRS Employer Identification Number (EIN). That last step won’t be needed if you don’t plan on hiring any employees.
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Lastly, corporations are what most people think of when talking about business entities. They’re more complex both legally and structurally, which means they also follow a much more complicated application process. There are two types of corporations: the standard C corporation and the small business S corporation.
C corporations are larger and have more shareholders. C Corporations are also treated as separate entities, which means they’re taxed at a corporate tax rate. An article on Small Biz Trends highlights how the recent tax law changes make the C corporation a great option for small businesses thanks to the lower corporate tax rate. S corporations, on the other hand, elect to pay pass-through taxes which means that portions of the profits don’t directly go to the Internal Revenue Service. Unlike sole proprietorships and partnerships, you’ll need to file articles of incorporation to form a corporation. Similarly to LLCs, you’ll also need to get an Employer Identification Number.