Join Martha Garzon for an in-depth discussion in this video Choosing your business structure using five key questions, part of Running a Web Design Business: Defining Your Business Structure.
In this video, we'll explore five questions that can help you put together everything you've learned in this chapter and decide on the right structure for your business. First, how many owners will your company have? For a single business owner, a sole proprietorship or an LLC is a good option. For two or more owners, your options include general partnership, LLC or S-Corp. Remember, that an S-Corp is limited to only a hundred members, however. For a business with many owners, a C corporation is your best bet. And now, our second question. How much money did you have for startup cost and maintenance? You may recall that sole proprietorships and general partnerships are inexpensive to start up and easy to maintain. Usually, the only annual fees required for these business types are for local permits or business tax receipts. Corporations are the most expensive business structure. Compared to a, a corporation, an LLC is a simpler business type. However, it's not cheap to start up and it requires some money for maintenance since most states have annual fees. Also, some states tax LLC income. If you don't have any money for startup costs and maintenance, a sole proprietorship or a partnership will be a good option. However, if you have some money, an LLC is a better alternative. Third question. Do you want to protect your personal property and assets from lawsuits against your business? As we discussed, in a sole proprietorship and a general partnership, there's no distinction between the business and the owner. This means that if the business gets sued or falls into debt, the owners can lose all their personal property.
Corporations and LLCs offer limited liability. This means that the business itself is responsible for all of the debts and liabilities. If you want to protect your personal property, you should establish a limited partnership, a corporation or an LLC. Only this type of businesses can protect you against your business' lawsuits and debt. Fourth question. Do you want to reduce your self-employment taxes? The owner of a sole proprietorship or a partner in a partnership are considered self-employed and must pay 15% of self-employment tax on the entire net income of the business. Owners of a corporation only pay FICA taxes on their wage income, but not on the entire income of the business.
LLCs can select to be taxed as C corporations and S corporations. By doing this, the owners are not required to pay the self-employment tax on net income. Only corporations and LLCs taxed as C corporations or S corporations can reduce self-employment taxes. And the final question, how will you finance your business? Sole proprietorship usually struggle to raise money to finance their business. It's harder for this business type to get banks loans approved. Having a partner makes it easier to raise capital to finance a business since banks are more likely to approve joint loans for two or more people. Corporations can sell stock and they have a higher credibility among banks and lenders. Usually, it's more difficult for an LLC to raise capital than a corporation.
Investors tend to prefer investing in corporations than in LLCs. Sole proprietorships and partnerships cannot sell stock. LLCs can privately sell membership interest, but not stock. If you want to sell stock on the public market to investors, a corporation is your best choice. Take some time to evaluate these five questions thoroughly before deciding on a business structure. Then, consult a lawyer or an accountant to talk more in depth and make sure that this business structure is truly the right one for you.
- Understanding your business-structure options
- Choosing your business structure using five key questions
- Establishing business names and fictitious business names
- Obtaining local licenses and permits
- Applying for city/county tax receipts
- Opening a business bank account
- Understanding state and federal taxes