Starting your own company is hard enough; selecting the most appropriate legal structure for your business can be confusing as well. There are many business entity forms to choose from — each having its own set of benefits and caveats — so you must decide wisely, since these are essentially the legal rules and processes under which you and your business will be operating.
This affects your taxes, legal liability, and how you share ownership in your company, among other things. So if you’re just starting off, we think you should keep these benefits in mind. This list is by no means exhaustive, but is a good starting point. Of course, please confirm all advice with your accountant.
1. Sole Proprietor
If you’re a one-person shop, sole proprietorship is normally the simplest and cheapest structure to start, though that doesn’t mean it’s the cheapest to maintain (especially during tax season). It also comes with unlimited liability, which can be worrisome. Still, in many states you simply apply for a license to do business, and report profit/income on your personal taxes. I’ve never used sole proprietorship as a legal structure simply because, even as a contractor, my personal tax situation was better served by other forms. Plus, you can avoid unlimited personal liability by using an alternate legal form.
2. C Corporation
A corporation, or C corp, separates the business entity from its owners, which provides strong protection from personal liability. And unlike many other legal structures, a C corp can sell shares to non-U.S. residents, making it easier to accept foreign investors. But a C corp also comes with double-taxation; that is, the business profits are taxed, then you are taxed again as a shareholder on dividends paid. So unless you are planning on selling the business or taking it public, the LLC form may be better for you.
Limited Liability Company, or LLC, is a good hybrid of the two forms discussed above. LLCs keep the limited liability benefits of a corporation while avoiding double taxation, and there are several “elections” you can make with the IRS to change the cost of filing at the end of the year. Most accountants I’ve worked with charge for your business and personal filings separately if you own an LLC, which is important for sidegig-style startups that are low on cash.
We use LLC and see a lot of LLCs in small, bootstrapped startups. But every business is different, so do your research and read up on the benefits of each structure, so that you’re prepared for discussions with your accountant and/or tax professional (especially if you’re being billed by the hour). We can also help you find the right incorporation service, as well as provide other assistance — reach out and we’ll tell you how.