Flareapps.com small business tip #009Understand Structures for Small Business
If you are considering starting a new business – whether you are a freelancer or want to run a small business with a handful of employees – one of the first questions you may ask is “What type of company structure is best for me?” Business structures in the U.S.A come in few different flavors. The general business types are sole proprietorship, partnership, limited liability company (LLC) and corporation. Small business owners and freelancers generally choose between operating as a sole proprietor, partnership or as a member of an LLC.
If you are a freelancer or operating a business without having formally chosen a business structure, you are operating as a sole proprietor by default. A sole proprietorship is the easiest to form and there is no separation between the company and the individual running the company. Any income or expenses incurred by a sole proprietor are part of the individual’s income and expense. Although easiest to form, the individual is liable for the company’s debts and any lawsuits brought against the company.
Similar to a sole proprietorship, the partnership is easy to form and there is no separation between the company and the partners running the company. In other words, profits, losses, and liabilities are said to “pass through” to the partners who report their share of income and losses on their personal tax returns. Partners may be legally liable for their own actions and the actions of their partner. Personal assets of either partner may be used to satisfy the business’s debt or legal judgements against the business.
An LLC, or Limited Liability Company, as the name suggests, limits the liability of an individual or individuals (known as “members”). One individual can be the sole member of an LLC. In an LLC, a member is usually not responsible for company debts or a company’s legal misdeeds. We say “usually” because individual liability varies from state to state, and, in some circumstances courts have held individuals responsible. This legal process is often referred to as “piercing the veil” – wherein the courts decide that a member or members are legally responsible for judgements brought against the LLC. For tax purposes, company income and expenses are passed through to members, divided equally among them and reported on each member’s personal income tax.
LLCs require more work to set up, including choosing a business name, filing an Article of Organization (formally providing details about your business and its members). Some states also require that an LLC create an operating agreement and publish an announcement of the LLC’s formation in a newspaper.
Flareapps.com small business tip #010How to choose the right business structure for your new business
Before choosing a business structure, it would be wise to speak to an experienced advisor. Consult a financial advisor, an accountant or lawyer, or find a Small Business Development Center (SBDC) near you. SBDCs operate in many cities across the U.S. and are funded by the U.S. Small Business Administration. SBDCs offer free business consulting services and free and low-cost training. Small Business Development Centers are a great resource for someone who has questions about starting a business.
Business Structure Infographic
Following is an infographic “Differences of U.S. Legal Business Forms” created by USC Gould School of Law:
More Information About Choosing a Business Structure
- U.S. Small Business Administration – Choosing a Business Structure.
- NOLO Law for All – 50-State Guide to LLCs and Limited Liability Protection.
- Legal Zoom – Pros and Cons of an LLC.