Owning a business is risky, exhausting and stressful – it is also one of the most gratifying ways an enterprising individual can earn a living. Finding success in a venture you built yourself is a singular feeling, but achieving it requires planning before the doors can open.
Choosing what type of business entity your venture should take is one of the first important steps to take. There are several options, each with their own pros and cons. These are among the most common entities business owners select and the benefits they provide.
Remember that it is always advisable to consult with an attorney experienced in business law before filling out forms or cutting checks. They will help you make sure that your business is starting on the right foot.
Professional corporation
When professionals choose to work together as a single business, they will often form a professional corporation (PC). This is usually the case for accountants, social workers, health care professionals and similar highly trained individuals. There are several advantages in creating a professional corporation, including:
- Liability – The corporation is responsible for any legal action taken against it, not the individuals running it.
- Tax considerations – Small business expenses like operating costs and equipment purchases are tax deductible, as are salaries and bonuses paid to owners and employees.
- Earning retention – Professional corporations may retain up to $150,000 of after-tax profits to improve the business.
Because of their unique benefits, professional corporations are often a good choice for individuals planning to grow a large business with strong earning power.
Limited liability company
This type of business entity has become very popular in the last decade or so. A limited liability company (LLC) provides its owners with more freedom than a corporation while still offering helpful benefits. A few core benefits include:
- Liability – As the name implies, a limited liability company has limited liability. Similar to a corporation, the individuals running the company are not on the hook if the company is sued.
- Flexibility – The founders of the company much more freedom of how to govern their business than a typical corporation; this includes but is not limited to how they pay their taxes.
- Credibility – Because of the recent boom of LLC startups, even an amateur entrepreneur can gain valuable credibility in the eyes of their markets by formally becoming an LLC.
LLCs are a common launchpad for people new to business, as well as established individuals looking to start side ventures.
Sole proprietorship
When a single individual wants to start a business, they will usually opt for a sole proprietorship. There are several good reasons a person may want to go it alone with their business, including:
- Freedom – As the sole founder and employee of your business, you will not have to worry about pleasing business partners, boards of directors or surly employees.
- Cheap and easy – While the counsel of a professional is always advisable, sole proprietorships don’t require any complicated forms or federal fees, making them easy for first-timers.
- Simple taxes – Sole proprietorships are not required to pay separate business taxes each year. Generally, they are only required to submit one additional form – Schedule C – on the owners Form 1040.
What sole proprietorships lack in high-level benefits they make up for in simplicity and cost-effectiveness. A home business or other small enterprise may consider this type of entity.
There are many types of business entities, each with their own advantages and challenges. The best businesses come from careful planning and smart decision making; if you are considering starting a new business, be sure to take these entities into consideration.
