The legal structure you choose for your business will affect how it functions going forward, from tax considerations to different financing options. If you’re wondering which business structure is right for your startup, you’ve come to the right place.
This guide from Pango Financial includes a brief explanation of four common business structures and how they may—or may not—work for you. Consider what makes your business unique and how you want to operate it as you choose a structure.
If you have a relatively low-cost business idea that you want to turn into a reality on your own, consider incorporating as a sole proprietor. These business ventures require very little paperwork and money to set up, and you maintain complete control over all of your operations.
The main downside of a sole proprietorship is liability. Under this structure, you and your business are considered a single entity. If you fall into financial trouble or are sued, you are personally on the hook for those expenses.
Limited Liability Company (LLC)
If you have one or more business partners and you’d like to split ownership of your business, consider structuring it as an LLC. Limited liability companies give their owners valuable flexibility in how they run their businesses. With that, you and your partners agree to specific terms via a contract. And as the name implies, owners of an LLC are not personally liable for company debts.
However, the flexibility inherent to an LLC can also be a disadvantage. If you and your partners have a falling out, legal outcomes can be unpredictable. Should one of your partners leave the company, the LLC may even dissolve.
Many small businesses choose to incorporate as S corps, as the taxation process is relatively straightforward. You bypass the double taxation that comes with C corporations, and you save on self-employment taxes as well. And just like with an LLC, owners are not personally liable for the company’s debts.
Potential drawbacks of an S corporation largely revolve around stock. You are limited to 100 shareholders, and you can only sell a single class of stock. This often discourages venture capitalists from investing in S corps, meaning you may need to secure alternate business funding services for your company.
This is perhaps the most popular legal structure for business startups. C corporations have a long-standing and well-defined structure, and they make it easy to raise money for your business. If you plan to fund your startup with your 401(k), you are required to structure the business as a C corp first.
C corporations can be more complex, though. You’ll need to appoint a board of directors and hold annual shareholder meetings in order to maintain your corporate liability protection. Plus, C corps are subject to double taxation—both on the corporate and personal level.
Choosing the right business structure for your startup can seem daunting at first, but there are several well-defined options out there. Think about your startup’s unique features and financial requirements, and enlist the help of a financial advisor if you need additional guidance.
If you’re looking to start a new venture, learn more about the financing options available for your business by checking out Pango Financial’s funding solutions tool.