Did you know that there were over 4.41 million new business applications made in the United States in 2020 alone? Millions of people are trying their hands at entrepreneurship to make it big in the corporate world.
Are you one of them?
If so, you’re at the right place. There are so many things that you’re required to do when you’re starting a business. And if you’re not a seasoned professional, then this process can be quite overwhelming, to say the least.
At each step, you’ll have to figure out what needs to be done and plan out the next steps as well. One such problem that you might encounter is when you want to choose your business structure.
But why?
The reason is that there are many different options out there and you may need to take your time to understand each before deciding which one is the right fit for you. However, this can also be challenging as some structures are very similar, like Sole Proprietorships and LLCs.
So, how can you choose between them?
To help you make a better-informed decision, we’ve put together this guide.
Who Can Own the Business?
The most important thing that you need to know about business structures is that they dictate the business ownership model too.
In the case of Sole Proprietorships, the owner has to be an individual. Also, these firms can only have a single owner. If you want multiple owners, you’ll have to opt for a different structure.
LLCs, however, don’t have such restrictions. They can have one or more owners. Additionally, there’s no restriction on those owners being individuals. Other entities like LLCs or foreign businesses can be the owners too.
How is the Business Taxed?
Your business structure plays a major role in its taxation too. Both LLCs and Sole Proprietorships offer a feature called “pass-through taxation.” This means that all the income or loss of the LLC passes to the owners and you’d have to show it in your personal tax return.
But there’s an issue here.
You’d have to pay a self-employment tax due to this reason.
While there’s no way to avoid this if you’re a Sole Proprietor, you can change things around if you’re in a multi-member LLC. You can get the LLC taxed as an S-Corporation and start getting treated as an employee of the firm. As a result, you’d have to pay corporate taxes for the S-Corp but no self-employment tax.
How Can You Start the Business?
Before choosing a business structure, you should carefully consider the process involved in starting the business too. It’s relatively easy to set up a Sole Proprietorship and start running it under your name.
But the same can’t be said for LLCs. There are several steps that you need to complete. These include:
- Filing your Articles of Organization
- Coming up with an Operating Agreement
- Paying the state filing fees
That said, it’s important to have an in-depth understanding of the differences between LLCs and Sole Proprietorships. To figure them all out, check out this infographic designed by GovDocFiling.
