LLC, Corporations, Partnerships, it is easy, or it’s not.
When I started my journey I was reading blogs online, and it seemed that building a business was easier than switch on the microwave and eat your dinner during a rainy day.
But actually it is very confusing to understand which is the best option for us, especially when you are starting and is you first experience as an entrepreneur abroad.
In this article we will go through the forms of business you can find in the US.
In any case I advise all people to ask to a professional CPA because your decision will depend on your personal business needs and on your goals. It must embrace more than just the presence of a business plan.
Let’s see together the most common ones, in order to be ready when you go to your accountant to make your business life plan!
What to keep in mind while choosing the best business structure for your company?
The choice of business structure has significant implications for taxation, liability, management, and the capacity to raise capital. That’s why is a more long term decision to take than it seems!
1. Sole Proprietorship
A **sole proprietorship** is the simplest and most straightforward business structure. It refers to a business owned and operated by one individual, without any legal distinction between the owner and the business entity.
**Advantages:**
– Easy and inexpensive to establish.
– Owner has complete control over the business decisions.
– Profits are taxed once as personal income.
**Disadvantages:**
– Owner is personally liable for all business debts and obligations.
– Limited capacity to raise funds.
2. Partnership
A **partnership** involves two or more individuals who agree to share in the profits or losses of a business. Partnerships are categorized as general partnerships (GP), limited partnerships (LP), and limited liability partnerships (LLP).
**General Partnerships (GP)** involve partners who are equally responsible for the management of the business and are personally liable for business debts.
**Limited Partnerships (LP)** have both general and limited partners. Limited partners have limited liability and are not involved in day-to-day management.
**Limited Liability Partnerships (LLP)** offer protection against personal liability for all partners, typically used by professional groups such as lawyers and accountants.
**Advantages:**
– More resources and ideas than a sole proprietorship.
– Profits are passed through personal tax returns.
– Flexible management structure (especially in LLPs).
**Disadvantages:**
– Personal liability for partners (except in LLPs).
– Potential for conflicts between partners.
3. Corporation
A **corporation** is a legal entity separate from its owners, providing the highest level of liability protection. Owners are shareholders who elect a board of directors to oversee major decisions and policies. Corporations can be classified as C corporations or S corporations.
**C Corporations** are taxed separately from their owners, and can raise funds through the sale of stock.
**S Corporations** allow profits, and some losses, to be passed directly to owners’ personal income without being subject to corporate tax rates.
**Advantages:**
– Limited liability for shareholders.
– Ability to raise capital through stock.
– Perpetual existence, regardless of ownership changes.
**Disadvantages:**
– Complex and costly to establish and maintain.
– Double taxation of dividends for C corporations.
4. Limited Liability Company (LLC)
A **Limited Liability Company (LLC)** combines the liability protection of a corporation with the tax benefits and flexibility of a partnership. Owners are referred to as members, and the LLC can be managed by the members or by selected managers.
**Advantages:**
– Limited liability for members.
– Tax flexibility (can choose to be taxed as a sole proprietor, partnership, S corporation, or C corporation).
– Fewer record-keeping requirements than a corporation.
**Disadvantages:**
– Can be more complex to set up than a sole proprietorship or partnership.
– Regulations vary significantly by state, which can complicate interstate operations.
I feel even more confused now!
Don’t panic! If you are googling this article I assume that you have a business in mind. Take out your business plan, think about your product and funding options( savings? Loans? Investors?).
Although there are a lot of nice stories out there, keep in mind that a normal company needs at least 18 months to be profitable and sustain its business, so think about all funding options that you have!
Try to make a budget for the next 1.5 years of operation to understand the money you need and add 10% more for expenses you didn’t count!
Remember that being an entrepreneur is a feeling, and you will learn most during your journey!
In the next article we will see how to file for your company and get the so famous EIN number!
Have a nice day and never give up💪🏻!
