Choose the Right Business Structure: Sole Proprietor, LLC, or S Corp
One of the most important decisions you’ll make as a business owner is to choose the right business structure. The one you choose will impact your personal risk and your finances. For small business owners, there are three main business structures to consider: sole proprietor, LLC, or S-corp.
Choose the right business structure: is sole proprietor for you?
A sole proprietor is a common and straightforward business structure. It means the business is unincorporated and run by an individual. In this structure, the owner is the business and there is no clear distinction between the two. That means the owner is also responsible for any profits, losses, debts, and liabilities of the business.
Many businesses start as sole proprietors without even realizing it. Any freelancer offering services and receiving payment is a sole proprietor. Working without the proper licensure or filings can create additional liability. Business filing requirements vary by state. You can find what’s necessary for sole proprietors in your state here.
Is an LLC the right choice?
A Limited Liability Company (or “LLC”) creates a business where the owner and the business are two separate entities. Most states will allow single member LLCs, which should not be confused with a sole proprietorship because they fall under a different set of rules and regulations.
This structure gives the owner increased protections and limits their personal risk. From a tax perspective, however, the owner and business are considered the same. The LLC’s profits and losses are passed to its members for taxes.
Can I be an S corporation?
An S corp isn’t a type of business entity, but rather a classification with the IRS that impacts how the company is taxed. They can pass income, losses, deductions, and credits through to their shareholders.
Many S corps are also LLCs and have the same risk and protections for members. S corps have tax advantages that LLCs and sole proprietors do not. S corps do not pay federal taxes as a company. Instead, earnings are passed through to shareholders, who then pay personal income taxes on their portion of the earnings.
Whether you choose to be a sole proprietor, LLC, or S corp depends on the type and size of your business, your industry, and the rules within your state. Each classification will have varying levels of protection for your personal and business assets and different tax implications, so be sure to do your research and talk with a qualified professional to be sure you are choosing the right business structure.