One of the most important decisions you'll have to make when starting a business is what type of legal structure it should be. There are a few different choices, and the one you pick can greatly affect the way you run your business.
"The most important thing is to understand your options," said Jennifer Friedman, CMO of the small business segment of CT Corp., which provides legal, compliance, incorporation and trademark solutions to businesses. "There are a few different lenses to look at when thinking about what's right for you. Each structure has a different impact on the liability the business owner will face."
The most common types of business entities are a sole proprietorship or partnership, where one or more individuals are personally liable for the business; a corporation, which is owned by shareholders; and a limited liability company (LLC), a hybrid structure that allows owners or "members" to limit their personal liabilities while enjoying the tax and flexibility benefits of a partnership.
While a sole proprietorship is the easiest type of business to start and manage, Friedman said that choosing to incorporate as a LLC makes the most financial sense for many small businesses.
"As a small business owner, you want to avoid double taxation in the early stages," she told Business News Daily. "The LLC structure prevents that and makes sure you're not taxed as a company and as an individual."
Other benefits include not having your business risks spill over into your personal assets, and gaining access to different types of financing that are typically not available to sole proprietors.
Some businesses find it more beneficial to register as a corporation, especially if they have investors that want a stake in the company. However, not all corporations are created equal.
"A common misconception is that all types of corporations are the same," Friedman said. "A C corporation is different from an S corporation, but most people don't even know that there are different types until they start doing research."
A C corporation, which is common among larger enterprises, is taxed as a separate entity from the individual owners, and shareholders are responsible for paying taxes on any profits they receive. An S corporation, on the other hand, is a specialized tax structure that prevents double taxation and personal liability (like a LLC), but follows a much stricter set of operating rules.
One important factor some business owners fail to consider when registering their company is their state and even industry regulations.
"States have different requirements for different business structures," Friedman said. "Depending on where you set up, there could be different requirements at the municipal level as well. As you choose your structure, understand the state and industry you're in. It's not a one-size-fits-all, and businesses may not be aware of what's applicable to them."
If after you've done your research you're still unsure about which business structure is right for you, Friedman advised speaking with a specialist in business law. For more information on the types of business structures you can choose, visit our guide on Business News Daily, or the Small Business Administration website.
Originally published on Business News Daily.
Correction: An earlier version of this article incorrectly listed Friedman's title as "vice president and CMO of CT Corporation."