Choosing A Corporate Structure That Fits Your Business Model
When you’re just starting a new business, you may not be certain of all the possible ways to set it up. The structure that you choose will depend on various factors specific to your situation. Here is an exploration of the four main types of corporate structures to help you choose one that best fits your needs.
A sole proprietorship is most adequate for startups and self-employment ventures that you’re just beginning. In this phase, you are most likely still testing your sales and marketing plans. It’s easiest to start here because the only thing required by you is to conduct your business, and file for self-employment tax. This means you will have to determine the differences between your ordinary and passive income so that you can file correctly. Once your business starts to grow, you’ll most likely want to switch over to a more complex structure.
The S Corporation is most relevant to small operational businesses based on sales or commissions. With this corporate structure, you can take a salary as an employee so that your net income is not affected by the self-employment tax. Another advantage of S Corp is the addition of asset protection. If you’ve started as a sole proprietorship, it may be wise to convert to this structure to avoid any risk involved with your business.
The C Corporation is popular among larger companies, but may not be ideal for small startup businesses. If you’re worried about saving on tax as a small business owner, you may find another structure more suitable. C Corps do offer extra write-offs in certain situations, but you’ll want to check to see how much you’d actually be saving. Success with this structure will depend on your income per year.
The LLC structure, or Limited Liability Corporation, can be beneficial for growing businesses. For example, you would be personally protected from any legal liabilities. Also, an LLC makes it easier to set up and document partnerships with both sides protected. Something to watch out for is high tax filing fees in your area, and the fact that there is no extra saving on taxes. However, you can always choose an LLC, and convert later to save on self-employment taxes.
For all of these corporate structures, it is important to get a professional opinion before choosing one for your business. Have a strong business plan in place so that you can evaluate each option thoroughly.