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Structuring your Business

Choosing the correct entity for your business can be a crucial decision. While planning, you need to know the different types of business structures and the advantages and drawbacks that will affect your start-up company.

Sole Proprietorship/Doing Business As (DBA)

Of the 5 types of business entities, a sole proprietorship is the easiest to start and set up. You are not required to register the business with the state. Therefore, you can start right away. The drawback of becoming a sole proprietor is the lack of protection you have. If someone sues your business, he or she can also come after your personal assets, such as your car or house. If you do not have a car or house, you may not worry about this factor. Another drawback is continuity. There is not a legal way for your family to continue the business without starting their own if something were to happen to you. An advantage of this business structure is you do not have to file an extra tax return. You only need to add a schedule C to your personal return when submitting your taxes. 

Limited liability means the member is not personally responsible for its company's debts, as Sole Proprietorships. The most important thing that an LLC does is protect your personal assets, if handled properly. For taxation purposes, an LLC is much like a Sole Proprietorship. This business structure will only require you to file one tax return, just like a DBA. You can, however, elect your LLC to be treated as a Small Business Corporation (SCorp). 

Limited Liability Company (LLC)/Single Member LLC

Limited Liability Partnership (LLP)/Multi Member LLC

These business structures have the same liability as a Single Member LLC and a Sole Proprietorship. The only difference is you must have more than one owner and you will have 2 tax returns. IRS will require you to file a Partnership Return (1065) that will pass through to the partner's personal tax return, depending on the percentage of ownership. You can, however, elect your MMLLC/LLP to be treated as a Small Business Corporation (SCorp)

Making a small business election has its benefits, if it is right for you. This business structure allows profits and losses to be passed through to the shareholders personal tax return. Shareholders will add or subtract these profits or losses from their annual income and be taxed based on the current tax rate.  However, this pass though allows you to avoid paying 15.3% in self-employment taxes, unlike the above business structures. There are IRS regulated do’s and don’ts that must be followed for SCorps.

Small Business Corporation (SCorp)

Small Business Corporation (SCorp)

With this business structure, profits and losses remain in the corporation, which will in turn be liable for the flat taxation of 21% of its profits. Shareholders will be taxed on their dividends they receive from the corporation.