Sixty-six percent of millennials want to start a business, according to a recent study from Bentley University. If you’ve gone through the work of creating a business plan, doing market research, and you’re looking to grow or secure funding, the structure of your business is a critical consideration. This is a discussion of some different business structures, risks and costs involved, and specific advantages of each structure.
Sole Proprietorship
The simplest business structure to have is a sole proprietorship. It is the lowest upfront cost because you don’t need to file any forms. The sole proprietorship is considered to have started when you begin conducting business. The major drawback is that this status exposes you to unlimited liability.
Let’s say you have a brick-and-mortar store worth $150,000 and you made additional investments of $100,000 into the business. If someone felt they were wronged by your business and opted to sue, you could lose the entire business in addition to unlimited personal assets. Sole proprietors are also subject to the federal self-employment tax on all earnings, which is 15.3% for 2024. For these reasons, many may want to consider other business structures as their business matures.
Limited Liability Corporation
To reduce risk, a common structure people look to is the Limited Liability Corporation, or LLC. As the name implies, the structure is intended to limit the liabilities of the business owners to strictly the business interests, protecting their personal assets.
In the prior example with $250,000 in business assets, only the $250,000 is at risk. Because of the liability reduction, there are form filings and legal requirements to meet, making this more costly than a sole proprietorship.
Similar to the prior structure, an LLC is a pass-through entity, meaning that business profits and losses flow to the business owner. Business owners will need to look to other structures if they’re seeking tax advantages or enhanced funding capabilities.
S Corporation
An option for business owners with 100 employees or less is known as an S Corporation. It is the costliest to set up and maintain out of the options discussed, but it comes with some key advantages. Similar to the LLC, the S Corporation will limit a business owner’s liability exposure. Unlike the LLC, there are some key tax advantages.
The S Corporation is also known as a pass-through entity but it allows business owners to choose to take both a traditional salary and dividend distributions from the company. This allows business owners to reduce their self-employment tax burden.
C Corporation
The final structure in this discussion is a C Corporation. This is the structure used by most publicly traded U.S. companies. Like the S Corporation, it can be costly to set up and maintain. C Corporations limit liability similarly to the LLC and S Corporation. Owners of C Corporations are subject to double taxation because the business is a tax-paying entity in itself, then it pays taxable income to the owner. C Corps do offer the most flexibility around raising capital because they can choose to issue and sell shares of stock, or partial ownership in the company.
How To Decide Which Structure Makes Sense
To figure out the best structure, it’s important to think through how you want to grow your business, how much risk you’re willing to take on, how hands-on or hands-off you want to be, the costs you’re willing to incur, and what a future exit might look like. Before moving forward with any of the listed structures, I would advise consulting a tax advisor and business attorney to ensure that you choose the corporate structure that best accomplishes your priorities.
This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-6531313.1 (4/24)(exp. 4/26)
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