Four Business Structures to Consider When Starting a Small Business
Congrats! You’ve decided to open your own small business. Did you know that small businesses account for 99% of all companies in the United States and employ 46.4% of all private sector employees according to the Small Business Administration? When an entrepreneur is passionate about an idea as the basis to open their own business, it can begin a fun, as well as challenging chapter. Starting a new business can be an exciting, fast-paced journey. Taking time to make the right decisions early can help take a business idea to reality and separate a successful business from one that remains a dream.
One of the first steps to take when deciding to open a business is to choose what type of business structure to select. The legal structure of a business can affect how the business taxes are handled, as well as who has liability if any issues arise. That’s why the experts at Atlantic Union Bank have compiled this list of a few of the most common business structures used by small business owners.
Sole proprietorship: A sole proprietorship is probably the easiest type of business to form. It keeps complete control of the business with a single owner. A sole proprietorship keeps the liabilities and assets for the company with the business owner. It is a common way for companies to start out as an owner as it tests their concept and ensures it’s a viable idea.
General partnership: If two or more people want to work together on a business, and only need a simple structure to work with, a partnership is a good choice. Two of the most common types of partnerships for small businesses are a limited partnership, where one partner has unlimited liability and the other partners have limited liability, and a limited liability partnership (LLP), where every owner has limited liability. An LLP helps protect the partners from debts against the partnership and gives every member more protection from actions other members of the partnership might take.
Limited Liability Company (LLC): A Limited Liability Company is a way to separate an owner’s (or multiple owner’s) assets from their business. It ensures that, even if something happens with the business like bankruptcy or a lawsuit, the owner’s personal money won’t be at risk. The LLC as a whole will generally face a lower tax rate than a corporation, but the owners will likely face a steeper self-employment tax, including contributions towards Medicare and Social Security.
Corporation: A corporation is another way to protect the owner’s assets from liability. A corporation is a more robust legal entity that can make a profit, be taxed and be held legally liable. While a corporation tends to have the strongest protection for an owner’s assets, it also requires more extensive record-keeping and reporting.
When considering how exactly to form a new business, it’s important to think about all the different factors that could influence what type of business you envision. The tax and liability implications can be important, so small business owners should ensure they fully understand what their business structure means for them. As part of starting a business, it’s often smart to consult with an attorney, an accountant and a financial advisor.
For more information, you can check out the Small Business Administration’s guide to business structures. And, when you’re ready to set up your business accounts, get in contact with the experts at Atlantic Union Bank! You can also learn more about the services we offer to business clients here.