Company Structure Breakdown

When you start your business, you need to know what the structure of the company will be as well as the costs associated with your decision. This will be a walkthrough of your choices and the benefits and costs associated with each.

In the United States your typical company structure is

-          Sole proprietorship

-          LLC

-          LLP

-          S-Corporation

-          C-Corporation

-          Non-Profit

Although a non-profit suggests that the company does not make any revenue that isn’t true. It is able to turn a profit, however these are typically funneled right back into the company.

For this article, we will focus on the for-profit company structures.

Sole Proprietorships, LLC's, and LLP's

A sole proprietorship is a structure that is typically utilized by freelancers, author’s, photographers, and others who own 100%, or close to, of their business assets and property. This isn’t to say that another company structure doesn’t own or cannot own 100% of their company though.

However, with a sole proprietorship, the owner also has all responsibility to the liabilities incurred by the business. If their business was sued, their personal assets would be at risk also.

The taxes for a sole proprietorship are done at an individual level similar to how one would do their taxes without a business. You would generate an income statement or P&L, of expenses and profits incurred by the business activities.

There are typically lower costs associated with starting a sole proprietorship. But you would still owe self-employment taxes.

The LLC

An LLC stands for Limited Liability Company. This is a similar structure to the sole proprietorship, but in this case if the business were to be sued the owner’s personal assets are at less risk.

To start an LLC there is paperwork required up-front and usually a fee to file this.

They also have pass through taxation, like the sole proprietorship. This just means that the income generated by the company is treated as the owner’s income.

An LLC is a popular choice for small businesses and single owners as there can also be tax advantages to structuring your business as an LLC.

The LLP

An LLP is similar to an LLC, however as it stands for Limited Liability Partnership, there must be at least 2 owners of the company. An LLC may have more than one owner, however, with an LLP, these owners would typically have more say in the company.

They would also typically hold some kind of license such as a law firm or accounting firm.

Pass through taxation is still present with LLP's.

S-Corporation

An S-Corporation is another version of the pass-through taxation, however, in some cases this is a more desirable outcome for tax purposes when compared to an LLC.

Essentially, the owner would assume to be paid a salary and the taxes they owe would simply come from that paycheck rather than the other business profits.

If the business grows to have a great increase in revenue, electing as an S-Corporation would give them the chance to pay a smaller amount in taxes by putting themselves on the payroll.

Of course, you would need to file more paperwork to be considered a for profit corporation and the filing fees associated would need to be accounted for as well.

C-Corporation 

A C-Corporation is the only structure that is double taxed. The owner’s or shareholders are taxed on the payroll, and the company is taxed as well.

It might seem silly at first to choose this type of entity given the taxation, however there could be more tax savings and deductions depending on your type of business. You can also have unlimited shareholders.

This can give your company a lot of room for growth if you plan to become global or even just national. And, as with S-Corporation, you would need to file the paperwork and pay the associated fees for doing so.

Final Thoughts

There are a few choices for your company structure and each one gives you different cons and benefits. Questions you need to ask yourself before making this decision are things like how big you want your company to be, the potential revenue the company could earn, and what makes the most sense for your business.

To future success,

~TKNott~