How should I structure my business?
How should I structure my business? This is a question that every business owner has to ask when they are first starting out. Or maybe you’ve been in business for a while, but you are questioning if your set up is the absolute best fit for you. Let’s do a brief overview of the most common business structures (or “entities”) and their attributes so you can make the best decision for your situation.
Spoiler alert: An S corporation is our most common recommendation for active businesses, but we’ll go through the others so you understand your options.
Let’s start simple: Sole Proprietorships
A sole proprietorship is another way of saying, “I’m doing business under my own name, there is no legal entity in place.” You can register a DBA (or “doing business as”) to market yourself under another name. This is a great setup for someone who wants to keep things simple, since there’s nothing to register, no extra tax returns to file, and no annual fees. We don’t normally recommend a sole proprietorship unless it’s related to a hobby or a small, temporary side gig.
Limited Liability Company
Commonly referred to as an LLC, a limited liability company is a legal entity that is registered with the state. It provides protection to its owners by limiting their personal liability. This means that debts, liens, or lawsuits against the company are limited to the assets inside the company as opposed to the personal assets of the company’s owner(s). An LLC is extremely common, and it makes sense for almost any operating business (as opposed to hobbies or small/temporary work). We also recommend an LLC for rental property ownership. If you are a business owner, or you are earning self-employment (or 1099) income, setting up an LLC for that activity is almost definitely a good idea.
Next up: S Corporations
S corporations (or “S corp” in short) are created by writing a letter called an “S election” and sending it to the IRS. (That’s right, the IRS is still making us write letters and send faxes.) An S corporation’s biggest advantage is that it helps you cut down on your self-employment taxes. We take a deeper dive on this benefit in other resource articles, but in essence, if you are a sole proprietor or you own an LLC, your income is going to be subject to both self-employment tax and income tax. So when your income reaches a certain level, it’s time to make the switch to an S corporation. In fact, our recommendation is that once your net income is between $20-$30K, you should turn your LLC into an S corporation. At that point, the cost of additional tax filings is outweighed by the tax savings offered.
C Corporations
Although we rarely recommend C corporations (or “C corps”), we’ll at least describe them here so we’re covering all bases. We typically dissuade from C corporations for one main reason: they are subject to two layers of tax. You read that right: you are taxed twice on your income. (Yikes!) You’re taxed first when the money goes into the C corp and then again when you pay yourself.
C corporations rarely make sense for business owners unless one or more of these factors apply to you:
You are trying to attract investors
You aren’t planning on pulling money out of the business
You are trying to take your company public
And there you have it!
This list is for businesses owned by a single owner, or even a husband and wife together. Clearly, this is a very surface level overview of the most common options and scenarios. If you are going to have additional partners, there are a few more options available to you.
Contact us and we can discuss all options with you.