The Trends in Small Business Ownership: Choosing the Right Business Structure

February 7, 2017

There’s nothing quite like the freedom that can come from owning a successful small business. Giving you the flexibility to enjoy your life as it happens and take charge of your own success, small business ownership is an attractive way to gain the financial independence many of us dream of.

When you start a small business, however, it’s important to do things right the first time around. Why? Because business involves two things we’ve all been trained to avoid: the IRS and the law.

The good news is, if you do the research and make the right decisions when setting up your business, you’ll be setting yourself up for success—and avoiding legal and financial hassles down the road. One of the first things to decide is the business structure that’s right for you. Choosing the right structure for your small business will help reduce personal liability while maximizing independence.

Factors to Consider When Choosing Your Business Structure

Answer the following questions to help you settle on the right business structure:
What are the associated startup costs?
What are the tax benefits of earning as an individual versus earning as an independent entity?
How much time and money will I have to spend on administrative tasks?
Do I need personal liability protection?
What are my future growth and investment goals?

Each business structure has its own benefits and drawbacks, but once you’ve answered these questions, the most suitable option for your needs should be clear.

The right business structure depends on the business type and your long-term goals.

Let’s take a look at the different business structures available and their associated benefits:

Sole Proprietorship
As a sole proprietor, you as an individual are the business. It’s simply a way of trading in your own name. Profit is made in your name and taxed like income from employment. However, you’re also personally responsible for debts or liability claims.

A sole proprietorship is extremely easy to set up and administer, so you can spend your time doing what you do best instead of getting stuck filing paperwork.

A partnership is similar in nature to a sole proprietorship, except it involves two or more partners. The business agreement will define each partner’s share of responsibility, profit, and liability. Partnerships are a great way of sharing some of the responsibilities of running a business. Keep in mind, though, that it does reduce your independence and ability to work on your own terms.

Corporations are separate legal entities owned by shareholders and controlled by a director or CEO. This is the structure of choice for large businesses with employees. It’s easier to grow and receive external investment as a corporation.

While there certainly are benefits to a corporation, they come at the expense of complexity and additional compliance requirements. As an owner, there is also the potential for double taxation of income, at the company and the personal level.

Limited Liability Company
A Limited Liability Company (LLC) gives you the income “pass through” benefits of a sole proprietorship, but the legal protection of a corporation. Income made by an LLC is taxed at the personal level, not as a business. In terms of liability, an LLC is an independent legal entity, which means that it can have multiple shareholders and employees, and owners do not assume personal responsibility for the business.

While LLC’s are a good option for the protection they afford the owner, they do require more time to establish and run.

What’s the Right Choice for a Small Business?

If you want to start something small—maybe to begin earning supplemental income before leaving your current job—then it’s best to keep it simple. You don’t want to miss your kid’s next karate tournament or a weekend BBQ with friends because you’re stuck doing business admin.

A sole proprietorship is the simplest business structure to establish and run. It’s also a nice option if you like to set your own goals and take responsibility for your own success. Although you are personally responsible for the businesses liabilities, it will likely be a good fit if your business won’t be:

Going into debt to buy expensive equipment
Employing anyone other than yourself
Making large contracts to supply other businesses
Operating in riskier sectors like child care, health, or construction

As long as none of these factors apply to your small business, you’ll likely face very little personal liability, making sole proprietorship a great choice.

Starting a business is a powerful way to reclaim your independence and achieve financial freedom. By choosing the right structure for your small business, you’ll be setting yourself up for a low-stress lifestyle. At Six Figure Profession, we’re here to help you make that happen. For more details on how to join our team, visit our website at or call us at (858) 837-1505.

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