Starting a business is a major milestone, and it is important that you carefully research the process and learn everything you need to know before you take the first steps. There are four business types, and each has different regulations, taxes, and restrictions.
Every type has some advantages and disadvantages, so the best option for you depends on the size of your business and what you see in its future. Here is everything you need to know about the four main business types and the regulations involved:
- Sole Proprietorship
The sole proprietorship is the most straightforward of the business types. It has the fewest regulations and the simplest taxes. This business has only one owner, and it is not considered to be a legal entity. The most important thing you need to know is that the owner is personally liable for any business debts.
Establishing a sole proprietorship is very easy. All you must do is register your name and get any relevant licenses you may need to conduct your business. To pay taxes as a sole proprietor, you will fill out a Schedule C, a Form 1040, and a Schedule SE.
You do not have to file documents with the state to form a partnership. In most cases, the business partners create an agreement between themselves regarding their plan to split profits and losses.
Your taxes include a Form 1065, which is a partnership information return. The profits and losses of your business will be reported on your individual income tax return, and you will file a Schedule SE for self-employment taxes.
Like a sole proprietorship, the biggest disadvantage that you need to know about a partnership is that you can be held personally liable for business debts, lawsuits, and the other partner’s actions. However, the simplicity of establishing a partnership and the loose regulations are appealing for many entrepreneurs.
- Limited Liability Company
A limited liability company, or LLC, is one of two main business types in which the company itself is responsible for the accounts instead of the business owners. Regulations for LLCs vary by state, but in most cases, the business owner has to file articles of organization and pay a fee to the state.
An LLC separates your business assets from your personal assets, and you can decide to pay taxes either as a partnership or as a corporation. Although you are not personally liable for business debts, you need to know that your LLC can be dissolved if you become bankrupt.
A corporation is the most complex and expensive of the business types. To start a corporation, you will file the articles of incorporation with the state and pay the necessary fees. Like LLCs, corporation owners are not personally liable for business debts.
There are two main types of corporations: C and S. C corporations pay an income tax, and the business owner pays an additional income tax. S corporations do not pay income taxes, but the business owner reports the revenue as personal income. Because corporations are owned by shareholders, you need to know that they’re subject to stricter regulations than all of the other business types.
To decide which of the business types is best for your company, you should consider the taxes, fees, regulations, and liability involved with each option. Some people like the simplicity and flexibility of a sole proprietorship, but others prefer the security of an LLC. You need to know your own needs and priorities for your business. Keep in mind, too, that you can change the business formation as your company grows.