Whether your goal is to sell as many products as possible on Facebook or to become the next Amazon, choosing the right business structure is crucial to starting things off right. The ideal business structure depends on your current resources, goals, and how you want to run things in general. So let’s start with the simplest legal business structure.
This is the ideal way to organize a small home business without a physical storefront. Business News Daily’s legal business structure guide notes that sole proprietorship is easy to set up and comes at the lowest cost compared to other structures. It also gives you tax deductions based on the fact that you and your business are treated as a single entity. But because of that, sole proprietorship also doesn’t offer the legal separation or protection of your personal assets, which could be a problem when your business and potential liability grows in the future. Should you want to dissolve a sole proprietorship, you can do so anytime without having to process any legal paperwork.
If one or a number of other people join you in forming the business, it’s worth considering creating a legal partnership. Similar to sole proprietorship, partnerships are easy to set up, but with the added time and expense of having to hire a lawyer for the required legal agreements.
You can either opt for a general partnership where profits and losses are shared equally, or a limited liability partnership (LLP) where a sole partner has control over operations while the others contribute and share profits. Whether you choose to become a general partnership or an LLP, a partnership could be the ideal choice if you want to start your online business with some friends or family members.
Limited Liability Company (LLC)
This highly flexible, hybrid business structure allows sole owners, business partners, and shareholders to enjoy the tax benefits of a partnership – while limiting their liability for any debts incurred by the business.
You can form an LLC alone or with any number of people, and either you or your partners (if any) can create a structure that divides profits, losses, and responsibilities however you want to. A step-by-step guide to forming an LLC by ZenBusiness walks business owners through how this is done by creating an operating agreement, which will detail members’ percentage interests, voting power and responsibilities, as well as other pertinent management/ownership matters. While forming an LLC can be costly and complicated it could very well pave the way to long-term growth – or if you want to, incorporation.
A corporation is a completely separate legal entity from its owners. Thus, they can get sued, file legal cases against others, own properties, sell them, and buy and sell ownership rights through stocks – in a capacity that’s wholly legally independent of its owners.
Depending on your goals, you can choose to be a C corporation, S corporation, B corporation, closed corporation, open corporation, or a non-profit corporation. Each of these corporate structures are subject to different tax laws determined by the Internal Revenue Service.
While forming corporations requires extensive research, paperwork, and money, this is also the most conducive business structure for raising large amounts of capital.
At the end of the day, whichever business structure you choose, remember that the requirements for formation typically vary from state-to-state. It’s up to you to check these requirements, confer with a legal professional, and choose the structure that will help get you to where you want to take your business.