Selecting your small business structure

Selecting your small business structure is important when you are looking for funding. It is also essential in order to obtain your business license and start operating your business. There are several types of business structures, however LLCs and S-Corporations tend to be two of the most well-known. Let's discuss them in further detail.

LLC

An LLC is called a limited liability corporation. Many small business owners declare this type of business structure because it allows them to open the business without having any liability like they do with sole proprietorship and partnerships. Unlike a sole proprietorship and a partnership, the company is liable for bad debts, injuries, and bankruptcies. This protects the individual from financial ruin if the company is unsuccessful. However, all the assets are the possession of the company, so the lender can sell them off in the event of a foreclosure or bankruptcy.

Small business owners often like the tax flexibility of an LLC since it only forces owners to pay taxes once on their yearly earnings versus paying individual and corporate taxes. The other benefit to an LLC is that you can have multiple employees and shareholders and you are not held to the same regulations as a corporation like recording the minutes of meetings.

The downside to an LLC is that the company normally will usually dissolve if the company goes bankrupt or one of the main shareholders passes away. You do not have the option of transferring your stock options in the company like you do with a corporation. However, you do have the option of changing your business structure after it has been in business for awhile and it is moving toward the level of a corporation.

S-Corporation

Declaring an S-Corporation is beneficial for small business owners that want to transition from sole proprietorship to a larger entity. Similar to a sole proprietorship, an S-Corporation is held to a lower taxation structure compared to corporations. Like a sole proprietorship, an S-Corporation owner can file their business taxes with their personal income taxes. You are only charged the taxes once, versus on a personal and corporate level.

Many investors will start up an S-Corporation as a retirement plan. Many S-Corporations will get started with a small investment and become successful, allowing the owner to sell it for thousands, even millions of dollars. Perhaps one of the most attractive benefits to an S-Corporation is that it protects the business owner from any liability. This is nice in the case of accidents, however depending upon your state and your loan, you may be liable for defaulting on a loan. This is especially true for lenders that require you to sign a guarantee when you are given the loan.

Which entity should you declare?

Picking the right business structure comes down to the size of your business and your position. If you image this company will grow to become a successful corporation one day, start off by setting it up as an LLC. However, if you just want to move up from a sole proprietorship and eventually sell off your business, an S-Corporation is the way to go.

Always speak to a financial adviser and a good attorney when you are setting up the basics of your small business. They can help you get the insurance coverage you need and they will help you get in compliance with federal, state, and local laws. The other benefit to hiring a good attorney and financial adviser is that they can look over your business plan before you submit it to lenders to ensure that you have all the right information you need to acquire the loan.