Choosing the Right Business Structure: A Guide for Entrepreneurs

Your company’s structure is important when you first start your business since it dictates which income tax you will file and how your company will be operated. The business structure also decides how your assets or other resources are at risk. 

So, if you are planning to launch your business and are confused about what business structure you should choose, then you can follow the article below and get the help to make your decision based on the tax aspect. 

Choosing a business structure

Your business structure or model is your first step to ensure a successful business; it decides your paperwork, tax liabilities, and the way things work. Your business structure depends on your business goals, industry, and many others. 

In the US, if you are launching your business, you should first register it with the respective state to get the tax ID number and other permits & licenses. The common business structures are partnerships, Limited Liability Companies, corporations, and many more. 

Know the Different Business Structures

To select a business structure that suits your business goals, you should understand what each one of them means and what they mean. Below, we have reviewed each business structure for you:

• Sole Proprietorship: If you don’t have to establish a distinct corporation to conduct business, it’s one of the more convenient ways to start a company. You can get the trade name and have complete control over your business, and test your idea before moving to a formal business. 
• Corporation: The corporation business structure has C corp, S corp, non-profit corporation, and many more.  The corporation generally is a legal entity separated from personal assets, hence has its assets and is responsible for the debt and obligations entirely.
• S Corporation: A corporation that does not have more than 100 shareholders, has only one class of stock, and elects to pass corporate income, credits, deductions, etc. are S Corporation.  In the US, if you wish to form an S corporation, you need to submit the Form 2553, which is duly signed by all stakeholders. 
• Partnerships: When two or more people together start a business, they each provide work, money, property, or expertise to help the business succeed.
• LLC: LLC lets you enjoy the advantages of a corporation and a partnership in one; however, you should know some US states have different rules for LLCs. The profits and losses of the company do not affect your assets; however, it may have a different set of rules. 

So, if you are a first timer and exploring the industry, it’s good to go with a sole proprietorship, whereas for high-risk businesses, you should go with an LLC business structure. 

Understand the tax Liability for each business structure

Now that you understand the type of business structure you have to choose, you should learn about its tax liabilities and ownership to be clear about the model.

Remember, your business may need to pay the state taxes as well, depending on the rules set by the state authority, so do check your respective US state rules for businesses. 

Forms you will need for each business structure

When you are filing federal business taxes, you should know which form you would need based on the business structure to meet your tax responsibilities.

The business structure is an important step, so when you decide on it, keep a few things in mind, such as federal government credits, the industry you are entering, competition, tax liabilities, tax benefits, and US state law for the particular business or legal entity. 

Remember, a lot of paperwork and strategies are involved when you launch a business, so do your research, take advice from professionals or industry leaders, and check the federal government’s programs before you start your business or choose the structure.