Starting a Business is exciting, scary and—let’s be honest—very, very confusing.
If you’re like most small business owners, you might not be fluent in “business legalese,” or have an MBA or formal business training.
This can make navigating the process a little tricky; deciding what kind of business structure to form is a frequent trouble spot.
A Sole Proprietorship, a partnership, an LLC, a C corp (and what about an S corp or a B corp?)—how do you choose which one is right for your business? And, moreover, what do they even entail?
This comprehensive guide gives you an overview of each business structure. There is no single “best choice,” but this guide will help you choose the right structure for your business.
So, let’s dive right in—here are the most common business structures you’ll encounter. I’ll go over who the business structure is right for, how to establish one, and things to keep an eye out for with each.
A Sole proprietorship is one of the most common small business structures.
It’s your business and yours alone, meaning you assume full responsibility and therefore are entitled to all the profits—and, it follows, are liable for all the losses.
Who is a sole proprietorship for?
If you are planning on running your small business by yourself, and you’ll be in charge of the various aspects of running your business and producing your products or services, a sole proprietorship may be for you.
For example, a personal trainer who is planning on offering one-on-one coaching for clients would be a great candidate for a sole proprietorship. So too would an artist who creates beautiful one-of-a-kind jewelry to sell on Etsy. Though plenty of other types of businesses can work well as a sole proprietorship, that should give you some idea.
How do you form a sole proprietorship?
A sole proprietorship is also the easiest business to form; no action is required on your part to become a sole proprietor.
So, you’re already selling your unique jewelry on Etsy? Congratulations—you’re a sole proprietor.
However, there will still likely be licensing and regulatory hoops to jump through, depending on your industry. You’ll want to check with your local secretary of state’s office website.
Additionally, if you’re planning on doing business under a name that isn’t your own, you’ll need to file for a DBA, or “doing business as.”
I covered how to get a DBA in this article here, as well as other details on how to register your business name, so check that out before you get started.
What should you be aware of?
A sole proprietorship is fairly straightforward to form, but here are some considerations:
- Your taxes will be fairly easy: A sole proprietorship is what’s known as a “pass-through” tax entity, meaning that all the profits and losses pass directly through the business owner and are reported on their taxes. If you’re the only person working for your sole proprietorship, a Schedule C form, a form 1040, and a Schedule SE form are the only additions you’ll need to make.
- You can still have employees: Just because you’re a “sole” proprietor doesn’t mean you can’t have employees. If you have employees, your taxes will be a bit more complicated, but not by much; see the IRS sole proprietorship page for more information.
- You may have more difficulty raising money: As you cannot sell any stock in your company, you will not be able to increase your company’s worth that way.
- You’ll likely have trouble getting a bank loan: Banks are often reluctant to give business loans to sole proprietorships, as they are seen as less credible.
- You are assuming full liability: If your business fails and you become overburdened with debt, your personal assets (like your car, house, or similar) are at risk. You are also personally liable for any legal issues that may come up. That means that if someone sues you, they could go after your personal assets.
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