Which Business Structure is Right for You?

Small Businesses: By The Numbers

There are 33.3 million small businesses in the U.S. That number makes up 99.9% of all businesses. The importance of small businesses to our economy cannot be understated, so we want to help businesses like yours succeed—and much of that success starts with one of the first big decisions you’ll make.

Starting With the Right Structure

Going out on your own and starting a business is a thrilling prospect. But before the doors open or the website launches, there are dozens of decisions to make, and few are more important than how to structure your business.

Picking the right business structure is crucial because it has big implications for taxes, liability, profits and even start-up costs. Let’s get into the different business structures, the pros and cons for each and other important details you’ll need to know.

What is a Business Structure?

In short, a business structure defines your company in legal terms. Business structures differ in many ways, including the way they’re taxed, the activities they allow – like how you can raise capital – or the liability protections they afford.

The Most Common Types of Small Business Structures

Defining Sole Proprietorship, Partnership, S Corporation, and Limited Liability Corporation.

Sole Proprietorship

Of all the ways to structure a small business, Sole Proprietor is the simplest and least costly to form. In this structure, one person owns the business and runs it. All business income and losses are reported with the owner’s personal income tax. There’s also less annual paperwork to file, compared with other business structures.

But with a Sole Proprietorship comes sole responsibility, as the owner can be held liable for all the financial obligations and debts of the business. Additionally, operating your business as a sole proprietorship can make it difficult to raise capital or borrow as there is no legal distinction between the owner and the business.

Partnership

For two or more people running a business together, a Partnership is the simplest business structure to form. There are three common types of Partnerships: General, Limited, and Limited Liability Partnerships.

A General Partnership consists of two or more partners sharing assets, profits and liability. All partners have a say in decision making and manage the operation of the business. With a General Partnership, it’s a good idea to create a partnership agreement before starting the business.

A Limited Partnership gives one general partner more control over the company, but with unlimited liability. Other partners, often investors, have limited liability but also less control of the company and its policies.

In a Limited Liability Partnership, all partners share ownership and management responsibilities and have protection from the actions of other partners but are liable for their own actions within the business. With Partnerships, the business itself doesn’t pay income taxes, as all income is reported on the partners’ personal income taxes. Business finances are also shared, which can lower the burden of start-up and overhead costs.

S Corporation

Small businesses often choose to be Subchapter S Corporations (rather than C Corporations) due to the liability protection and better tax advantages. An S Corporation offers its owners the personal liability protection of a C Corp, but the business is subject to only one level of federal taxation, as business profits and losses pass through the shareholders’ personal incomes and are not subject to corporate income taxes. S Corporations can sell stock, and its shareholders can elect a Board of Directors to vote on company policies. However, S Corporations can only sell common stock and are limited to 100 shareholders, who must all be U.S. Citizens.

Limited Liability Corporation (LLC)

As a business structure, an LLC gives you some advantages of a corporation and a partnership. An LLC offers good liability protection of your personal assets against lawsuits and bankruptcy, and you’ll have less of a tax burden than a corporation. Owners of an LLC don’t pay corporate taxes. Instead, the income and expenses get reported on their personal taxes. LLC owners are considered self-employed and can also receive the self-employment tax credit. An LLC can also have shareholders and can determine how to distribute profits among them.

Which Business Structure is Right for You?

There are many things to consider, like the type of business you’re starting, your appetite for risk, and how fast you hope to grow. Your business could fit into more than one type of structure. Be sure to weigh all these important factors before choosing.

Which Business Type is The Simplest?

If simplicity is what you’re after, Sole Proprietor is the answer. There’s little paperwork, taxes aren’t complicated, and the cost of forming the business is lower.

What’s The Most Common Business Structure?

For all the reasons just mentioned – like simplicity and low cost – it’s no wonder that in the U.S. 73% of small businesses are Sole Proprietorships.

Which Business Structure Has the Least Amount of Liability?

A Corporation (C or S) offers complete protection of your personal assets against lawsuits against the business. An LLC also gives you this same level protection. In a general partnership, partners share liability, and a sole proprietor is responsible for all liabilities.

What Type of Business Gives You the Most Control?

For total control, consider a Sole Proprietorship or an LLC. A Partnership will divide responsibility, but you can outline roles in the partnership agreement. A Corporation requires a board of directors to make many decisions, which limits individual control even more.

Which Business Structure is Best for Raising Capital?

A Corporation allows the most avenues for raising funds, whether through institutional investors, loans, or selling stock. An LLC can use loans or bring on partners to raise funds.

Need help with Business Banking?

Setting up your finances is one of the first things any new business owner should do. SouthState’s Small Business Banking gives you all the tools – from borrowing to cash flow management – to get you up and running and help you stay on top of every detail. Our Small Business Specialists will be there to help your business thrive, every step of the way. To get started, call us at (800) 277-2175.