When starting a business, it’s important to understand the legal framework you’re working within because not every industry has the same rules. Our guest and owner of three businesses, Michael Farca, has a couple tips for up-and-coming entrepreneurs about how different businesses are structured.
What Are the Types of Business Structures?
Before you can officially set up a business, you’re required to send some information about your new business with the IRS for tax purposes. One of the things you have to establish with the IRS is what type of business you own.
The IRS recognizes five types of businesses:
- Corporations: Has several shareholders accumulating and trading money and property for capital stock. Corporations are legally viewed as an entity separate from its shareholders.
- S Corporations: A corporation that passes corporate tax responsibility on to its shareholders for tax purposes.
- Partnerships: Owned by two or more people who share the profits and expenses.
- Sole proprietorships: Unincorporated and owned by only one person.
- Limited Liability Company (LLC): A business with tax liability protection. Depending on state law, the business may be owned by any number of people. Not every type of business is allowed to be an LLC.
Liability Protection & Tax Laws
It’s essential to know what type of business you’re interested in running because it will affect how the business is run. Most importantly, the business structure you choose dictates how much you’ll be paying in taxes and how liable you are as a business owner. Each structure has its own set of pros and cons.
Sole proprietorships and partnerships tend to have high liability risks, but both of them may be eligible to be reclassified as LLCs. Both C and S Corporations have built-in liability protection but will usually require extensive tax services as compared to a partnership or sole proprietorship.
Starting your own business can seem like a colossal task, but it doesn’t have to be. Follow Michael Farca on Twitter @mfarca to stay updated on how to manage your business.