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Starting your business

Step 1: Make a plan PART 6 OF 6

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Decide ownership type: Sole owner, partnership or corporation?

What's the right ownership structure for your business?

• Sole proprietorship: This is the simplest business structure. With this structure, the business owner represents the company legally and fully.
• Why it works:
• Filing taxes is quicker and easier. You just file your 1040 with business losses and profits.
• You don't need as much set-up. No lawyer necessary.
• Finances are simpler and easier to manage. You'll need a separate bank account, but otherwise, your money is the company's money, and vice versa.
• The disadvantages:
• You're personally liable for the company's debts and actions. That means your personal wealth and assets are linked to the business.
• It's all up to you. All the decisions are yours, and you're solely responsible for the company's success or failure.
• Harder to get money. Right now you think of your business as being small and manageable, but if you're successful it will grow. You may need capital later, and outside investors may be easier to come by if you're a corporation.
• Limited Liability Company, or LLC: An LLC is somewhere between a sole ownership company and a corporation. Owners are called members, not partners or shareholders.
• Why it works:
• It offers more liability protection than a sole proprietorship.
• You can decide how to distribute the profits.
• You don't have to take minutes at your meetings, unlike corporations.
• You avoid the double taxation issue of paying corporate and individual taxes.
• The disadvantages:
• The LLC dies when a member dies.
• The LLC may be dissolved if a member files for bankruptcy.
• It's more complicated than a sole ownership.
• C Corporation: The C Corporation is called a regular corporation.
• Why it works:
• It's legally independent from its owners.
• It has a board of directors and shareholders who can help guide the company.
• It might lower your income taxes.
• The disadvantages:
• Its structure is complex and is likely to need an attorney to set up.
• That board of directors can be complicated and a potential source of conflict.
• S Corporation: An S Corporation, also called a Small Business Corporation, is approved by the IRS.
• Why it works:
• No corporate tax.
• Potentially easier to sell.
• Some liability protection.
• Some tax benefits.
• The disadvantages:
• Limits on issuing stock.
• More difficult to get outside investors.
• Corporate meetings, just like a corporation.