Structure Your Business
As a business owner, there are lots of rules, regulations, and information that you’ll need to know before you get started, and a lot you’ll learn along the way. We encourage you to consult with an attorney about which structure makes sense for your business and what local rules and regulations you should be aware of and follow. Similarly, we encourage you to talk with an accountant to better understand your local, state, and federal liability requirements.
Below is a high-level overview of the different information you will need to take to get your business structure squared away
Different Types of Structures
Broadly, there are four types of business structures.
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Sole Proprietorship
ButtonA sole proprietorship is the default business structure. In other words, all businesses are sole proprietorships until they indicate otherwise. With a sole proprietorship, you are the sole owner of the business assets and liabilities, which means there is no separation from the business entity and you as a person. The downside is that you can be held liable for the debts and contracts of the business. The upside is that you are only eligible for personal taxes.
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Partnership
ButtonIf you are starting a business with one or more partners, then you have a partnership. Business partners add to the business and receive profits from the business. A partnership is similar to a sole proprietorship, but it just includes more than one person. Most states require the partners to sign some sort of partnership agreement to outline how profits are shared and how liability is distributed.
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Limited Liability Company (LLC)
ButtonLLCs create a separate legal business entity that protects the business owner from personal liability, thus protecting your personal assets. Each state has different rules and regulations relating to LLCs, so be sure to evaluate state-by-state rules. The administrative burden to forming an LLC is higher than a sole proprietorship, but you as the business owner receive more personal protection. As an LLC, you have different tax liabilities than as a sole proprietorship.
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Corporation
ButtonCorporations are the most complex business structure and are how most large companies are structured. This type of structure will provide you with the most protection, but it requires substantial paperwork and administrative work. It is really intended for larger well-established businesses that need substantial liability protection.
There are some variations of each type of business structure. or a detailed breakdown of the business designations, we would recommend you read how to choose the right business structure in this resource from the SBA.
Choosing a Business Structure
Once you have your business plan, you’ll need to decide how your business is structured. As with your plan, the business structure you start with may not be the one you have two or five years from now as your business evolves. For now, it is important to decide which structure makes sense for you and your business idea. Your business structure determines which set of rules and taxes will apply to your business.
When you are evaluating which structure to choose, it is important to think through the following criteria.
- Liability protection
- If you have personal assets that you would like to protect or are wary of assuming full liability for business-related debts and obligations, then an LLC or corporation may be better suited for your business.
- Potential size - With each business structure, even a sole proprietorship, you can have employees. If you intend to be a larger, more complex business, a corporation or LLC may make more sense than a sole proprietorship.
- Taxes
- How you and your business are taxed is dependent on the business structure you choose. Evaluate the different types of taxes (personal, business, self-employment, etc.) that come with each structure.
- Funding and credit needs - Typically, lenders are wary of providing funding to sole proprietorship or partnerships without a partnership agreement. These types of business structures are sometimes seen as riskier investments. If you are focused on receiving funding from an outside lender, be sure to understand the type of business structure they prefer.
Register Your Business
Once you’ve determined what structure makes sense for your business, register your business with federal, state, and local governments to authorize it to operate. Registering your business is a fairly straightforward and low-cost process and includes the following items.
Federal and state tax ID
By registering, you receive a tax ID that is your business personal identification number that replaces the need to use your Social Security number. This allows you to open a business bank account that is separate from your personal assets.
Name
Be sure to register your business name with the state government. If you decide to register your business name at the federal level, you’ll need a trademark. Depending on your business and state, you may also want to or need to register a Doing Business As (DBA) name as well. For more information on the DBA registration process, check out this article.
Incorporation
Incorporation is the process of making your business a distinct legal entity. It gives you as the business owner some protection, legally separating you and your business. Incorporation is often more costly and labor-intensive than registering your business, but it can be worth the added protection. When you incorporate, you’ll need to provide some extra documentation based on your business structure.
Licenses and Permits
Be sure to apply for the right licenses and permits with the local and state governments depending on where your business is located and your industry. It is vital to keep documentation of these licenses and permits and annually check on their status.
Getting your business off the ground with the right paperwork is an important first step. Once you’ve done so, focus on spreading the word about your business.
Marketing your business
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