LLC? S-Corp? Sole Proprietorship? Tips for deciding what type of business to create

An important step in starting a new company is choosing the business structure. The structure will determine how you pay taxes, aspects of your business operations, and whether your personal assets are protected. Should you be a sole proprietorship? Should you set up an LLC or an S-Corp? The following tips will help you decide and get started setting up your business.

What structure should you choose?

Which structure you pick mostly depends on how you envision the future of your business. If you plan on being the sole owner for a low-risk business, such as consulting or tutoring, a sole proprietorship may be fine for you.

On the other hand, a Limited Liability Company (LLC) is preferrable if you want to protect your personal assets while maintaining management flexibility and avoiding corporate paperwork. If you start an LLC, you shouldn’t plan on going public or selling your company soon.  

If you plan on building a more complex company that needs outside financing, an S corporation structure might be more appropriate.

Sole proprietorships are very easy to form. In fact, if you do business activities but haven’t registered your business as a specific kind of business, you are automatically considered a sole proprietorship.

As such, your business is not its own entity. Your business assets and liabilities are not separate from your personal assets and liabilities. This kind of business is best for a low-risk business because you can be held personally liable for business debts. Sole proprietorships are also a good choice if you want to test a business idea before launching a formal business.

Starting a Limited Liability Company (LLC) is a popular choice for small business owners. That’s because LLCs protect your personal assets while being straightforward to set up. If your company faces bankruptcy or someone sues you, your car, home, and personal savings accounts won’t be at risk. If you are starting a higher-risk business or if you have personal assets you want to protect, an LLC is a good choice.

In an LLC, all profits are passed directly to the owners and taxed as personal income. With an LLC, you won’t pay corporate taxes, but the members of the LLC will be required to pay self-employment taxes as well as taxes towards Medicare and Social Security.

Potential disadvantages are the fees and paperwork involved in establishing your business as an LLC. Also, an LLC structure can limit your options for funding. Typically, only banks will loan to LLCs. Venture capitalists usual only fund corporations in exchange for a share of the profits.

Should I start a Limited Partnership or LLC?

If you are starting a business with another person or several people, you may consider structuring it as a limited partnership. LPs are common in real estate and other types of investment partnerships. In this structure, one party (general partner) has control over the assets and is held personally liable. The other partners, known as limited partners, are investors who cannot participate in management decisions and do not have personal liability. If all business partners want to have an active role in managing the business, you should consider an LLC instead.

S corporations, commonly known as S corps, protect business owners’ personal assets and have more funding options than an LLC. However, S corps have quite a few more filing and operational requirements. For example, S corps need a board of directors that hold annual shareholder meetings and oversee the company management.

S corps can’t have more than 100 shareholders, which would make it difficult to go public. On the other hand, S corps allow for profits and some losses to go through the owners’ personal income without paying corporate tax rates. That said, not all states treat S corps the same, so check with your state to get the full details about how they are taxed.

S corps must meet eligibility requirements, file a special form with the IRS, and register with their state. In addition, it’s worth noting that in some cases, LLCs can file as S corps since an S corp is an IRS tax designation while an LLC is not.

• Visit BBB’s BizHQ for more advice on setting up and running a small business. 
• Check out these tips from BBB on hiring a small business attorney. 
• You can find more information on the BBB Business Resources page.