What type of business structure should I choose?
Great question! There are two main areas to consider before selecting your business type.
Liability protection
Taxation
Sole Proprietorships pass all liability and taxation directly to the owner of the business. This means, all income and expenses related to the business are reported on the owner’s personal tax form. The business owner uses their personal social security number in establishing bank accounts and vendor or contractor agreements instead of other business identifiers. This is the most basic form of business ownership.
LLC’s provide the business owner with separation of liabilities and taxation. In essence, the LLC is it’s own entity (think of it as it’s own person). The LLC will have it’s own business identifiers and it’s own taxes. The business identifiers provided will be used to create bank accounts and vendor or contractor agreements. This may be the better licensing option for those that want the separation of liability and risk.
A couple things to keep in mind:
There may be times where LLC owners are asked to personally guaranty liabilities. This is often the case with leases and loans. When personally guaranteed, it allows the lender to cross over the LLC line to the business owner for collection of any debts.
LLCs also have another stage. Initially LLCs are considered “undesignated” for IRS reporting, however and LLC can elect to be an LLC filing with the IRS as an S-Corp. Your CPA can guide you on when it would be a good time to convert your LLC to an S-Corp.
Finally, Sole Proprietorships can be converted to LLCs and LLCs can be converted to INCs. So if you need to change your existing business structure you are able to at any time.
This Q&A does not constitute legal, accounting, or tax advice and
does not address state or local law.
