A recent study from Bentley University found that 66% of millennials are interested in starting their own business, making the consideration of business structure an important topic for potential entrepreneurs. One of the simplest structures to consider is a sole proprietorship, which requires no formal filing but exposes the owner to unlimited liability. This means that personal assets are at risk in the event of a lawsuit, making it important to consider other options as the business matures.
One such alternative structure is a Limited Liability Corporation (LLC), which limits the liability of business owners to just the business interests, protecting personal assets. While this reduces risk, there are additional costs associated with setting up and maintaining an LLC. However, for those seeking tax advantages or enhanced funding capabilities, other structures may be more suitable.
For business owners with 100 employees or less, an option to consider is an S Corporation. While it is more costly to establish and maintain than other structures, it offers key advantages such as limiting liability exposure and providing tax benefits. S Corporations also allow for business owners to take both a salary and dividend distributions, reducing self-employment tax burden.
The final structure discussed is a C Corporation, which operates similarly to large publicly traded companies in the United States. While it can be costly to set up and maintain, C Corporations provide flexibility in raising capital by issuing shares of stock. However, owners are subject to double taxation because the business itself is taxed, as well as the income distributed to owners.
When deciding on the best structure for a business, it’s important to consider growth plans, risk tolerance, level of involvement, costs, and future exit strategies. Consulting with a tax advisor and business attorney is recommended to ensure the chosen structure aligns with the business’s priorities. Overall, the choice of business structure should be tailored to the unique needs, goals, and circumstances of the individual entrepreneur, with professional advice prevailing over generalized information.
