Sometimes all it takes is a spark of inspiration that makes you decide you want to strike out on your own and start your own small business. That being said, there are steps to take when forming a small business. This includes choosing a business structure. There are several options to consider.
If you are going into business on your own without any partners, you will likely be considered a sole proprietorship unless you register as a different type of business. Sole proprietorships are the default business structure for individuals going into business by themselves. Sole proprietors are personally liable for all the debts and obligations of the business. Sole proprietors can get a trade name if they wish.
If you are going into business with someone else, the most basic business structure available is a partnership. Partnerships are covered by a partnership agreement. According to the U.S. Small Business Administration there are two common types of partnerships. One is a limited partnership and the other is a limited liability partnership.
In a limited partnership, one partner has unlimited liability, and the other partners have limited liability and control over the business. Profits go through the partners’ personal tax returns and the partner with unlimited liability pays self-employment taxes.
In a limited liability partnership, all partners enjoy limited liability. They are protected from debts against the business, and they are not responsible for the actions of the other partners.
A limited liability company, or LLC, is an attractive option to some business owners because it protects the owner(s) from personal liability. This means that the owner(s) own personal assets are not at risk when it comes to the debts or obligations of the business. However, owners of an LLC are required to pay self-employment taxes. If an owner wants to leave the LLC, the business must be dissolved and reformed to reflect the new ownership unless there is an already-existing agreement that states otherwise.
Learn about all your options
These are only three common types of business structures. There are other business structures that may be an option in certain situations. In the end, potential business owners will want to explore all their options so they can make informed decisions.