The positive trends in the market over the last year have reignited the American entrepreneurial spirit. While it is a great time to start a business, you want to make sure you are surrounding yourself with a team that can make your business viable. Here are two important considerations to get right at the outset so your business begins on a path of success.
The first consideration is determining what business structure fits your needs and vision. Personal liability is something every new business owner needs to understand. For example, if you put out your shingle and run your business as a sole proprietor, you are personally liable if someone chooses to sue you. This means that you may lose your home, vehicles, and other personal property in addition to your business property if the claimant is successful. However, if you chose to run your business as a Limited Liability Company (LLC), you would have no personal liability in the scenario described above. You could lose your business assets if the claimant successfully sued your LLC, but the claimant would not be able to take your personal property.
The business structure you choose will affect whether your business will remain private or public. The only structure with the option to “go public” – meaning it can become a publicly traded and owned entity – is a Corporation. This could be a good option if you are seeking to quickly raise capital for expansion, but you should seek the guidance of your professional team to know this is a good option for your business.
The second consideration is deciding what taxing option will decrease your tax liability over the course of running your business. As a sole proprietorship, any business revenues are taxed on your personal tax return. Partnerships – whether general, limited, or limited liability – use a “pass through” structure and the partners are taxed individually for their share of profits. There is a double tax on C Corporations because it is taxed as an entity AND dividends are taxed. Taxes for S Corporations pass through the entity to the shareholders. The fascinating thing about the LLC is you have the flexibility to choose how you are taxed. A single-member LLC’s default taxing option is a sole proprietorship and a multi-member LLC’s default is treated as a partnership. However, you can file a form with the IRS to elect to be taxed either as a C or S Corporation. Every situation is different and I always have my clients speak with a proficient accountant to ensure a taxing election is made that limits their tax liability.