Given that about a quarter of all small businesses fail in their first year, you need to make sure you have a structure to weather any issues.
If your small business structure is strong enough, you can ensure that you stay ahead of problems and give every stakeholder what they expect. Your small business can avoid becoming a statistic if you set it up for financial success with the right legal designation.
Here are the most important designations to know when it comes to starting your own company.
Sole Proprietorship
If you’re considering starting a business but not sure how big you’ll grow or how far you’ll go, this is your ideal designation. Claiming business expenses on your individual tax return is possible with a sole proprietorship. This is one of the easiest and most straightforward types of businesses to start.
When you’re the only person working for your business and managing all the aspects of it, then you’re in a sole proprietorship. If you’re not interested in hiring other people or still waiting to see if there’s interest in your product or concept, then you’re still in this position.
For anyone trying out their hand on entrepreneurship for the first time, starting a sole proprietorship is simple. You can build up your profile this way and then get the ball rolling without having to expand your business beyond what you can handle.
A Business Partnership
If you’re running a business that’s unincorporated but run by multiple owners, that’s a standard partnership. In these cases, there are often contracts and statements in place to ensure that everyone is treated fairly. When profits are dispersed, they’re typically spread between the people involved and need to be reported on tax returns.
There are general partnerships and limited partnerships. If you’re in a limited liability situation, you can even have a legally defined limited liability partnership.
The structure of your partnership relies on how you set it up. It’s good to have these things in writing so that you’re protected. Have a lawyer look over your partnership to ensure that you’re protected from any liability or any issues caused by your partners.
You don’t want your resources to be drained because your partner made a bad decision and got themselves sued.
Limited Liability Companies
There are some hybrid business structures that give you some of the benefits of having a corporation even if you don’t have a large structure. An LLC is exactly that type of structure. This keeps you personally protected against anything that happens with your business.
If your business loses money or you end up having to owe someone money through your business, your personal assets are going to be protected. When you’re building a business structure that you want to protect personal liability of members then this is the way to go.
The profits are going to be taxed either on the member level or the corporate level depending on how your business works. Your LLC is a way to protect yourself from high tax bills without having to itemize every single purchase you make.
S Corporation Can Help You Build
If you’re looking to start building a corporation, you can do that even on a micro level. Every company starts off somewhere and your business that’s soon to take over the world could start as an S-corporation. When have fewer than 100 involved and invested, this is the way to build.
Your corporation is allowed to have one class of stock available to shareholders in this kind of corporation. You’re only allowed to have 100 shareholders, but they can’t be held by another for-profit business. If anyone without a green card who doesn’t meet the residency requirements of the IRS, this will make you ineligible for this type of designation.
The profits that your business produces are going to be taxed via your shareholders’ tax returns. Every one of your shareholders is also going to have limited liability.
Click here for tips on how to get started creating your own S corporation.
C Corporations Are Bigger
If you’re ready to take on the world with your company, a C Corporation could be the designation for you. Your business is going to be taxed on a business level to start with. Following this, your business is going to be taxed a second time around based on the kinds of profits that are distributed to your shareholders.
Each shareholder is going to have limited liability for the debts of the business. While they might not lose their personal funding when hit with problems from your business, they’ll still have their personal assets protected.
While you might be able to switch business structures after some time, you should start off with the one you’re comfortable with for a number of years. Switching becomes complicated quickly and you’ll have to deal with all kinds of legal fees when you’re switching things up.
You want your shares to remain strong and your shareholders to be confident in your business so make sure you decide what you want early enough. This will keep your business protected against stormy weather.
Small Business Structure Can Be Powerful
While you might think that small business structure is by its nature more fragile than larger businesses but that’s not the case. If you start off with a strong foundation, your business can yield stable and reliable returns year after year. All you have to do is maintain the structure, protect all stakeholders, and keep an eye on any legal fees that could be coming down the pike.
When you’re looking for a lawyer, check out our guide to find what you’re looking for.
