How Do I Structure for My New Business?

Updated: May 6

Starting a new business can be overwhelming. One of the most important steps a new business owner needs to take is determining what the business structure is going to be. But how do you know where to start? Smart business owners should start by consulting with a CPA and a lawyer to gain a better understanding of how the following structures could best serve their business.


The most common business structures are:

  • Sole Proprietorship

  • Corporation

  • S-Corporation

  • Partnership

  • Limited Liability Company (LLC)

Sole Proprietorship


Are you the only owner of the business? Setting up this type of entity is the easiest. However, this entity can leave you exposed to business legal liability because there is no legal difference between you personally and your business. For example, if you own a donut shop and a customer falls and sues your shop for negligence, both your business and personal assets are at risk.


Corporation

A corporation (C-corporation/C-Corp) offers the most legal protection because the business is a separate legal entity from the owner. A C-Corp allows a business owner to bring in other owners by issuing shares of common stock. The downside to a C-Corp is that setting up and meeting the regulatory reporting guidelines can be time-consuming. There’s also a corporation tax collected. Corporation tax returns can be complicated and require more planning and preparation than individual returns.


S-Corporation

If your business is an S-corporation (S-Corp), the profits and losses of the S-Corp are passed through to each shareholder’s tax return.


Partnership

A partnership files a tax return, but the profits and losses of the partnership are passed through to each partner’s personal tax return. This type of tax is generally processed using the Schedule K-1.


Limited Liability Company (LLC)

An LLC allows you to limit your personal liability for business risks without having to meet the same level of regulatory requirements as a corporation. Based on individual state tax laws, there are many different LLC structures.


Work with a CPA or an attorney and consider the pros and cons of each business structure. Once you know your business structure, you can use this information when working with your CPA to understand the tax filing deadlines and tax ramifications.


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