Choosing your business structure as you set on your journey to make it as a successful entrepreneur is most commonly a dilemma for every start-up. The question as to what type of business structure would be most suitable for your type of business is crucial and it would be advisable to consider various factors based on your operational objectives before opting for the right business structure.

In this article, we have attempted to simplify various business structures, trying to highlight their pros and cons, in providing an initial insight for what options you have while commencing a business in United States of America.

To be upfront, there is not one type of business structure that fits all nature of businesses.  It all depends on what your vision to accomplishment is.  For starters, some of the basic questions that you should be asking yourself are:

1.     Will this be your Solo adventure or one with only few employees?

2.     Will you need partners, collaborators, or investors for your business?

3.   Will you be the Sole decision maker for your business, or will it need a strategic team of partners or directors?

4.     How much will you be aiming to grow your business?

5.     How will you raise finances for your business?

6.     Will you need debt/loans or investor monies to scale up?

7.     Will you want to scale-up the business and look for an exit strategy?

Such basic questions may end up being complicating and confusing for you to arrive at your choice of business structure, some of which you may have not even thought of or have answers to.  So, at this instance, you would need guidance and expertise of professional business consultants who can advise you neutrally and help you arrive at the best decision.  GJM & Co. offers free initial consultation in helping you arrive at the best business structure suitable for your venture.

The Business environment in United States offers a pentagonal choice of business structures for you to choose from.  Let us understand them briefly:

Sole Proprietorship

A Sole proprietorship is the most vanilla form of business structure highly common across the states.  A data suggests more than a tri-quarter of US businesses comprise of sole proprietorships, primarily since it is easy to start one.  Commonly, new entrepreneurs who are not in full time and commencing business as a side gig or folks working as an independent contractors use this structure.  The key highlights summing up the pros and cons about this structure are:

–       It is an unincorporated form of business, owned and run by One person.

–       In eyes of the IRS, this business is the same entity as yourself personally.

–       There are no complicated statutory compliances for its reporting.

–       Fastest option to start your business.

–       As a sole proprietor you are personally liable for any debts or legal action on your business i.e., personal liability on your individual assets.

–       Your business income is taxed as your personal income itself and added to your income tax return while filing your taxes.

–     A Sole proprietorship can be converted into another business structure as your business grows, which could offer your personal liability protection.

Conventionally, individuals with small business activities opt for a sole proprietorship.

General Partnerships

A general partnership is mostly like a sole proprietorship since they too are not incorporated, easiest to start and do not have any liability protection.  Personal assets of partners are on the line in case of a suit or debt default.  It is however a convenient way for 2 or more people coming together joining hands for a business.  Legally, even a handshake to a partnership is binding, however it is always advisable to make the necessary paperwork in form of a partnership agreement for safety of the partners involved.  Such agreement would outline the capital contributions, profit or loss distributions, modalities of entry and exit of partners and other operational aspects.  A partnership too can be later converted into different business structure which could offer personal liability protection.

Limited Liability Company (LLC)

An LLC is famous for small business owners to acquire personal liability protection.  A sole proprietor or any partnership can convert into an LLC.  Sole proprietors can also form single member LLCs in comparison to a multi-member LLC suitable for larger group of partners/people.

LLCs are treated as separate business entities, just like corporations, which means the business and ownership is segregated.  All revenue, expenses, assets, and liabilities belong to the LLC and not its members.  As a separate legal entity, an LLC offers protection to its members from having their personal assets challenged in case of bankruptcy or loan defaults.  For tax purposes however, an LLC is treated as a “Flow-through” entity.  Thereby, all profits or losses flow through to the owner members of the LLC and are reported on their personal tax return and taxed accordingly.

LLCs have flexibility in how they are taxed. You can choose to be taxed as a corporation. Single member LLCs can be taxed as sole proprietors and multi member LLCs can be taxed as partnerships. This flexibility makes the structure type desirable for its potential to minimize taxes paid.

It is noteworthy that LLCs are taxable and fees applicable in every state differently.  Hence, it is crucial to pick a suitable state for its registration first up, that could be beneficial to you.  It ideally could be your home state or any state where your business needs to be operated from.  A professional business consultant like GJM & Co. can help you choose your state by explaining the costs and compliances involved in each state.

Corporation (C-Corp)

Similar to LLCs, C-Corp offers its shareholders limited liability protection which means their personal assets too are not at stake for the business liabilities.  A C-Corp can sell its stock/shares and add new shareholders or bring on board new investors.  Hence, a C-Corp isn’t conventionally dependent on simply secured or unsecured loans to raise its capital needs.  A C-Corp however is subject to formation costs and paperwork.  Firms like GJM & Co. can take care of forming your corporation and manage securing its Employer Identification Number (EIN), as well as manage your annual filings with the State departments where your corporation is based.  Such a business structure is however subject to double taxation, i.e., it must pay its income tax as well as the profits distributed to its shareholders is taxable on their personal returns.

When you incorporate, you become a C corporation. But there is a special tax designation called an “S corporation” you may also consider when choosing a business structure.

S Corporation (S-Corp)

The S-Corp is really not a different business structure, for one to opt for this, he/she has to form a corporation first up, however there is an option to switch the corporation status to that of an S-Corp provided its eligibility requirements are met.  Contrary to a C-Corp, S-Corp net incomes are all flow through incomes, thereby the shareholders report these on their personal income tax returns.  But there are strict limitations to an S-Corp, few being the number of shareholders is restricted to 100 only and all of them should be US citizens or residents.  Further, only one form of stock/shares can be issued to such shareholders and all need to be paid a reasonable salary.  So usually if your business does not need large number of shareholders and you can keep up with the statutory reporting requirements, you may opt for an S-Corp status as a corporation.

Hope the aforesaid pentagonal choices on offer in US to do business have been able to provide you a decent insight for the vehicles to ride for your entrepreneurial adventure.  You can always choose to change your vehicle as per the requirements of your business increase from a sole proprietorship to a corporation. Your CPA or accounting firm like GJM & Co. can help you with all questions and requirements that you may have with respect to your business structure as this is certainly not something you need to lose your sleep over.  A proper consulted process of choosing can help you identify what you want most from your business and when a change might be needed.  Any changes to a business structure have elements of accounting and bookkeeping associated with it and so a firm like GJM & Co. can also help you keep up to date with your financials to make timely and informed decisions as well as complying with any statutory filing requirements for such transitions.

We trust this article was helpful to you in understanding in brief how to choose a structure for your business.  Should you have any queries or need consultation with your application, Schedule a Call today or write to us at info@gjmco.in.