The business structure you select will dictate the tax and legal requirements your business needs to meet. Most small and online business owners choose one of the following structures:
When it comes to operational complexity, it doesn’t get any simpler than a sole proprietorship. You must register your name, start operating your business, properly report your profits, and pay taxes on it as you do personal income. However, the sole proprietor is personally fully liable for all of the business debts and liabilities. Furthermore, it’s frequently hard to secure outside investment funding. Although a sole proprietorship is the simplest way to do business because there is no business structure, its increased liability over other options offsets simplicity. In addition, a sole proprietor does not get any tax benefits through a company structure. All profits are self-employment income for tax purposes and taxed as such at the end of the year.
A partnership business structure might appeal to you if you start your online business venture with a business partner. If you do nothing to register a different type of partnership, and you work with a partner, you are a general partnership under the law. In a general partnership, all partners are equally fully liable for all debts and actions of the business, and the personal liability is limitless as it is in a sole proprietorship. While this is the case, there are different types of partnerships recognized by most states which provide various levels of limited liability and tax benefits, but which require registration with the state.
An LLC provides limited liability within the simplicity or flexibility of a sole proprietorship or partnership arrangement, with the default benefit of pass-through taxation, making it one of the most frequently used small and online business structures. Suppose you want the simplicity and control of a sole proprietorship, but with the advantages of limited liability. In that case, an LLC is likely the best option for you. In the partnership context, you can negotiate the type of control between the partners within an operating agreement, while obtaining limited liability protection for the business operations. Registered partnerships, LLCs and corporations have reporting requirements with the state governments in which they are registered or operate.
Like an LLC, a corporation limits liability. It’s more complex to set up and maintain, but it can be an ideal choice depending on your situation. A corporation can often support outside investment funding better than other entity types. Corporations have a longer history and therefore are sometimes more reliable and predictable for owners, managers, and investors. Unfortunately, for single owners or small businesses, the corporate tax applicable to Corporations is a deterrent because profits to owners are taxed at the corporate level and then at the personal level. However, Corporations that meet certain requirements can make an S Corp tax election to have pass-through taxation. Just remember that there are many tax treatment differences between the entity types which can make a big difference for how you want to operate.
It’s always best to consult with a well-versed business attorney to identify the proper business structure for your new online business. You must understand the tax implications and other legal requirements of the entity you choose and the level of control you will have. At Hackstaff, Snow, Atkinson & Griess, we understand how confusing and overwhelming it can be to choose the correct business setup for an online business. We work hard to ensure you make an informed decision that stands to benefit you and your company for years to come. Give us a call today to learn more about how we can help.
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