Starting your own business can be a vehicle for anything, from a side hustle to a full-time career - and plenty of people do it. According to the U.S. Small Business Administration, nearly 60 million people - or 48 percent of U.S. employees - work for a small business.
Before you declare yourself open for business, however, a few important decisions can help lay a solid foundation. One is the legal form of your business - anything from an LLC to a subchapter S, to name just two. There are several different types of small businesses, and your choice can impact your taxes, liability, expenses, paperwork, and the ability to raise funds. Here’s a brief overview of the six main small business types.
What is a sole proprietorship?
- Definition: A sole proprietorship is the simplest form - and the IRS default if you don’t declare one. Usually it is just one owner/operator who has complete control.
- Taxes and reporting: All business income or loss is reported on your personal tax return, but self-employment taxes must be paid and, depending on income, quarterly payments may be required.
- Good to know: With this type, you and your small business are one and the same, which means you can be held personally responsible for any debt or legal claim. Banks might be hesitant to lend to sole proprietors.
What is a partnership?
- Definition: Partnerships generally have two or more owner/operators and may be either general or limited. In a general partnership, the individuals take equal responsibility for management, debts, etc. In a limited partnership, one or more partners operate the business while “limited partners” provide investment, generally have no control and are liable for up to the amount of his/her contribution.
- Taxesand reporting: With a general partnership, business income or loss is passed-through to personal tax returns, and you and your assets can be held responsible for any debt or legal claim.
- Good to know: The limited variety is a much more complicated structure (administratively) than a general partnership.
What is an LLC (limited liability corporation)?
- Definition: Limited liability corporations (LLC) and partnerships (LLP) offer owners/operators a way to separate their personal assets from their business - they are kind of hybrids of sole proprietorships/partnerships and corporations.
- Taxes and reporting: Business income or loss is passed-through to personal tax returns, and all members are allowed full participation in the business.
What is a subchapter C corporation?
- Definition: Known as C-corps, traditional corporations are totally separate legal entities from any individual. The biggest benefit of this structure is that personal assets are protected from risk.
- Taxes and reporting: Subchapter C corporation benefits include the ability to raise funds, but these are often offset by high administrative costs and complex rules and formalities that differ state to state.
- Good to know: C-corps are subject to double taxation of earnings - once as business income and again as personal income when dividends are paid to shareholders.
What is a subchapter S corporation?
- Definition: The S-corp is attractive to small business owners because it provides the liability protections of a C-corp without the double taxation.
- Taxes and reporting: Subchapter S corporations are still subject to much of the administrative expenses and rules of a traditional corporation.
- Good to know: S-corps are limited to just 100 U.S. citizen shareholders and one class of stock.
Other small business options
Benefit corporations (B-corp), close corporations, nonprofit corporations, and cooperatives are a few of the other business frameworks to be considered if your business’ purpose and mission is focused on giving back to the community in big or small ways.
Remember: Consult with a business attorney and tax professional to choose a structure that offers stability for you.