One of the first decisions that has to be made when you want to open a business is what type of business structure you’ll use. Small businesses are typically either sole proprietorships or limited liability companies (LLCs).
Both of these business structures are viable options for new small businesses but there are important points to consider about each one.
Cost to establish the business
A sole proprietorship is free to start with the exception of obtaining any licenses necessary to legally operate the business. There are filing fees and other expenses that come with establishing an LLC.
Division of finances
A sole proprietorship doesn’t offer any division between the owner’s finances and the company’s. This means that the business owner’s assets can be claimed to pay debts or take care of lawsuits.
There’s a division of between the business’ finances and the owner’s when the company is an LLC. This means that if there’s no comingling of finances, the owner’s personal assets are protected if the company is in financial trouble or is sued.
Pass-through taxation
Taxes in both of these business structures are handled through pass-through taxation. This means the profits are taxed on the owner’s personal income tax returns instead of being taxed on the business level and then again when the owner pays their own.
Making sure that the company and the owner are protected is one of the most important things to do. Working with someone who understands the legal aspects of starting a new business is critical.