A lot of entrepreneurs and small business owners move forward with a sole proprietorship as a business structure just because it’s the simplest and most straightforward of all to establish – but that doesn’t necessarily mean it’s the smartest play to make it comes to protecting, securing, and growing your financial future and your business moving forward.
As a business funding institution Excel Capital Management deals with thousands of businesses a month. We have put together this guide to help you figure out the best structure for your small business.
It’s easy to see why so many entrepreneurs and small business owners are little bit unsure about the necessity of incorporation when they are just getting started or are still a smaller operation, but you don’t have to be listed on the New York Stock Exchange or have offices all over the world to leverage the benefits that incorporation brings to the table.
Below we highlight a couple of key details you’ll want to think about when it comes time to consider incorporation, helping you better understand the different types of business structure you can choose to move forward with as well as the benefits and drawbacks of each.
The right structure in the right method of incorporation will be heavily informed by the kind of business you are running, your goals, and a whole host of other very specific details pertaining to you and your business alone.
At the same time, though, this high-level view of these options will certainly help you sift through your choices and make the right call for sure!
Let’s get right into it.
As we highlighted above, the overwhelming majority of new business owners and entrepreneurs are going to move forward with a sole proprietorship – in large part because it’s the easiest to set up and it just sort of “fits” solo entrepreneurs that don’t see bringing on a lot of employees aside from themselves.
Fantastic for those just beginning, as well as those that aren’t sure if incorporation is the right road to take, this is more of an “entry-level” business form that has the potential to evolve and grow as your business and needs do moving forward.
Partnerships can be between two different entrepreneurs or a group of entrepreneurs that are splitting the business in one way or another (most commonly in even proportions, though that isn’t always the case) and is intended for smaller businesses that look to remain around the size of a sole proprietorship but may bring on a couple of employees later down the line.
These businesses (obviously) revolve around a multi-owner structure. You’ll have to establish who owns what, who’s responsible for what, and how the ownership structure shakes out before you form it legally. General partnerships are pretty much split right down the middle, though limited partnerships divide ownership shares up in asymmetrical kinds of ways.
The most common form of corporation in the United States today, this is also one of the most basic forms of incorporation you could choose to move forward with – and a form of incorporation that offers significant benefits compared to sole proprietorship and partnerships.
With this kind of corporation, you get full liability protection as well as a host of tax advantages, tax advantages that can be enhanced by registering your corporation in the right locale. Taxes are handled differently when you move forward with this kind of incorporation, though, so there’s going to be a bit of extra paperwork you’ll have to navigate if you’re going to go down this direction.
If your intention is to build your business as large as possible if you already have a number of employees and expect a higher even more in the future, and if you don’t want to have to deal with a lot of the restrictions that can be placed on you by incorporating through an S Corporation, this is probably the approach you’re going to want to take
In the most basic of terms, S Corporations are essentially a modified form of C Corporation – so much so that S Corporations actually have to start off as a C Corporation and then later go through the application and approval process to get their designation legally altered.
There are a lot of big benefits to going through that application process and getting that designation altered, though – with the biggest benefit being that you will have an opportunity to capitalize on some pretty major tax savings.
The reason that people go with this form of incorporation more often than not is that the Corporation has its gains, its losses, and all credits and deductions passed directly onto shareholders who then file that information individually on their personal tax returns.
This basically means that these forms of corporations aren’t responsible for paying taxes federally – though it does mean there’s a bit of red tape with the IRS to get these kinds of corporations set up and running.
If you’re going to go down this road you want to make sure that you don’t ever anticipate your corporation growing beyond 100 shareholders total or you’ll have to revert back to a different business structure and will lose these tax benefits.
Limited Liability Company (LLC)
LLC incorporation structures are a bit of a hybrid between a sole proprietorship or a partnership and a corporation, offering a lot of the benefits that incorporation has to offer combined with the benefits that simple and straightforward sole proprietorship/partnership structures offer, too.
There are a multitude of different ways an LLC can be taxed which means there’s a lot of financial flexibility with this approach, but you’ll also be able to enjoy limited liability protection similar to what you get with more traditional incorporations.
This form of business can be a little bit expensive to maintain in certain states across America (though not everywhere), but the flexibility they offer is fantastic for small business owners and entrepreneurs specifically.
These are some of the most common forms of business incorporated in the US today (and historically), and for good reason. They offer – as we highlighted above – a lot of the benefits that incorporation provides without a lot of the drawbacks.
Going Through the Incorporation Process
There are a couple things you want to think about before you incorporate a business, though, critical details that we highlight below.
As always, it’s a good idea to get advice about incorporation from a licensed attorney and accountants you can trust. They’ll be able to help you steer your business in the right direction, helping set your business up for success today and well into the future.
Licensing – Before you incorporate your business you’ll need to move through any specific industry licensing or compliance requirements that may be required for your business to operate in the first place. Without these, your business – and the incorporation process – is dead in the water.
Unique Name – It’s important that you find a unique name to give your new business or corporation, one that isn’t close to any other business or corporation or you may run into legal issues later down the line. You can always register your business under one name and then move forward with a DBA (Doing Business As) name you use for signage, marketing, etc.
Registered Agent – The registered agent that you select is going to be the individual or organization that receives official mail for your business and your company. This is a huge piece of the puzzle that you’ll want to figure out before you go through the incorporation process for sure.
File Articles of Incorporation – Every new corporation is going to have to go through the process of filing articles of incorporation (or corporate charter documents) with the state that they are registering their business in. Most of the time this is the state that you live in in the state that you’ll operate your business out of, though there are some advantages to registering your business in states like Nevada or somewhere like Washington, DC even if you aren’t going to physically base your business there.
Create Corporate Documents – Not only are you going to have to create corporate bylaws (if you’re going to be creating a new corporation) or establish operating agreements (if you’re running an LLC), but you’re going to have to make sure that these documents are filled out in accordance with any of the state laws, rules, and regulations that govern these forms of incorporation specifically.
The odds are good that you’ll have to file your documents with your Secretary of State as well, so make sure that you have an attorney look over your details before sending them off.