All About Business Ownership
You’re ready to be your own boss and start your own small business, finally. It’s the first in many important decisions you will make. One of the next is to decide how you will structure your business. Your choice will have a big impact on your legal status and your tax liability so it’s important to carefully consider the options in consultation with your legal and tax professional. Here are the options used by many small businesses, along with pros and cons for each.
Small businesses can be organized a number of different ways. Each is centered on who owns and controls it. Here are common options:
This is the most common form of business ownership, especially for new businesses. There is no distinction between you and your business. You own it all and are responsible for all.
- Easy to form and dissolve with minimal cost
- Offers flexibility since you call all the shots and keep all the profits
- One of lowest tax rates for business structures
- Unlimited personal liability for all financial and legal obligations, even for actions of your employees
- Limits funding options from investors
- Puts the entire burden on you
Two or more people who contribute funding and/or skill to the business and jointly share in its operating results. The profits, liability and management may be divided equally or in portions. For example, one partner may provide funding but leave the day-to-day management to another partner.
- Easy to form
- Shares the financial commitment (and expands total funds available)
- Combines complementary expertise and skills of owners
- Unlimited personal liability for all financial and legal obligations, even for the other partner’s actions
- Potential disagreements among partners
- Must share profits
- Difficult to dissolve
A separate legal entity that limits liability and assumes responsibility for the business, separate from the owners. For small businesses, this typically takes the form of a Limited Liability Company (LLC) or a Subchapter S-Corporation (S-corp), which have elements of a proprietor/partnership and a corporation. These types limit liability but taxes are passed through to the owners, avoiding a double taxation by the business and owner.
- Can limit financial liability, protecting personal assets
- Expands funding and management to outside sources, like stockholders
- Easier to continue the business when one shareholder leaves
- Shareholders play role in management
- Both corporate and personal taxes may be incurred (unless an LLC or S-corp is used)
- More difficult to form and dissolve
- Legal restrictions on how business can operate
It’s important to know your choice for business structure isn’t necessarily permanent. It can change over time as your business grows. Contact your legal and tax professional to help you decide which is best, especially since the requirements can vary by state. The Small Business Administration has additional information that can help you decide.