How To Choose A Business Structure That Fits Your Financial Priorities

Sixty-six percent of millennials want to start a business, according to a recent study from Bentley University. If you’ve gone through the work of creating a business plan, doing market research, and you’re looking to grow or secure funding, the structure of your business is a critical consideration. This is a discussion of some different business structures, risks and costs involved, and specific advantages of each structure.

Sole Proprietorship

The simplest business structure to have is a sole proprietorship. It is the lowest upfront cost because you don’t need to file any forms. The sole proprietorship is considered to have started when you begin conducting business. The major drawback is that this status exposes you to unlimited liability.

Let’s say you have a brick-and-mortar store worth $150,000 and you made additional investments of $100,000 into the business. If someone felt they were wronged by your business and opted to sue, you could lose the entire business in addition to unlimited personal assets. Sole proprietors are also subject to the federal self-employment tax on all earnings, which is 15.3% for 2024. For these reasons, many may want to consider other business structures as their business matures.

Limited Liability Corporation

To reduce risk, a common structure people look to is the Limited Liability Corporation, or LLC. As the name implies, the structure is intended to limit the liabilities of the business owners to strictly the business interests, protecting their personal assets.

In the prior example with $250,000 in business assets, only the $250,000 is at risk. Because of the liability reduction, there are form filings and legal requirements to meet, making this more costly than a sole proprietorship.

Similar to the prior structure, an LLC is a pass-through entity, meaning that business profits and losses flow to the business owner. Business owners will need to look to other structures if they’re seeking tax advantages or enhanced funding capabilities.

S Corporation

An option for business owners with 100 employees or less is known as an S Corporation. It is the costliest to set up and maintain out of the options discussed, but it comes with some key advantages. Similar to the LLC, the S Corporation will limit a business owner’s liability exposure. Unlike the LLC, there are some key tax advantages.

The S Corporation is also known as a pass-through entity but it allows business owners to choose to take both a traditional salary and dividend distributions from the company. This allows business owners to reduce their self-employment tax burden.

C Corporation

The final structure in this discussion is a C Corporation. This is the structure used by most publicly traded U.S. companies. Like the S Corporation, it can be costly to set up and maintain. C Corporations limit liability similarly to the LLC and S Corporation. Owners of C Corporations are subject to double taxation because the business is a tax-paying entity in itself, then it pays taxable income to the owner. C Corps do offer the most flexibility around raising capital because they can choose to issue and sell shares of stock, or partial ownership in the company.

How To Decide Which Structure Makes Sense

To figure out the best structure, it’s important to think through how you want to grow your business, how much risk you’re willing to take on, how hands-on or hands-off you want to be, the costs you’re willing to incur, and what a future exit might look like. Before moving forward with any of the listed structures, I would advise consulting a tax advisor and business attorney to ensure that you choose the corporate structure that best accomplishes your priorities.