So far, we’ve looked at exactly what constitutes a “Microbusiness” and why you should start the Business of You, Inc. two years prior to actually starting a business. Now, we’re going to take a brief look at the types of business structures that you have to choose from as well as the biggest pros and cons of each.

In addition to what is said in this blog, you may want to also check out what the IRS says about each, since you will be dealing with them, at least once a year, no matter what. 

Sole Proprietorships

In a sole proprietorship, the individual and the business are considered the same entity; there’s no distinction between the business and the owner of the business. This is the simplest business structure to set up and may be perfect for those who have no employees or business contracts to worry about. In most states, if you are going to conduct business in a name that is different from your own, you need to apply for a DBA (Doing Business As) permit.

Pros of a Sole Proprietorship

• This is, by far, the simplest business structure to set up.
• You do not need to file separate business tax returns. All income made from the business is considered personal income, so it’s easy.
• You are in total charge of your business. There are no board members or meetings required, and your entire profits (or losses) are yours.

Cons of a Sole Proprietorship

• If your business makes a substantial profit, because the money is considered the same as your personal income, you may have a significant tax bill to pay.
• Should anyone ever choose to sue your business or your business suffers a loss, your personal assets are not protected. The same holds true should your business be forced into bankruptcy.

General Partnership

General Partnerships are not much different than sole proprietorships, with the exception that more than one person is involved, more than one person is contributing funds to the business, and each person shares in the profit or loss of the business. The split of earnings and responsibilities of each partner does not have to be 50/50. The IRS regards a partnership as a relationship between the individuals, not as an entity. 

Pros of a General Partnership

• The responsibilities and work involved with the business are shared. One person is not responsible for everything, and the partners can support one another to grow the business..
• Each partner brings different skill sets to the table. Those skills can complement each other for the good of the business.

Cons of a General Partnership

• Once again, the business is not considered a separate entity, so if the business fails or if it is sued, both partners’ personal assets are at risk.
• On many occasions, one of the partners does not pull his weight in the business but still expects to reap in the rewards, i.e. profits, that the other has earned through hard work.
• Oftentimes, individuals in a partnership sign no formal contract, which means, should things go awry and the partnership dissolve, it could lead to a costly lawsuit. The stress of being responsible for the actions of a partner and sharing responsibility for the business will sometimes dissolve a once-solid friendship.

Limited Liability Corporations (LLC)

An LLC officially makes a business owner and the business separate entities. Hence, should a business be sued or suffer from losses or bankruptcy, only the business suffers the consequences. This is, providing the LLC is run separate from the business. Should an LLC be run as a sole proprietorship, with assets intermingled, the LLC will be treated as a sole proprietorship in court. Owners of an LLC are now considered “members,” and there can be an unlimited number of members involved in an LLC.

Benefits of a LLC

• The biggest advantage of an LLC is the flexibility of tax filings. The owner of an LLC can file the profit and losses of the business as a sole proprietor or as a separate entity.
• When an LLC has numerous “members,” it increases the amount of funding a LLC might have.

Cons of an LLC

• An LLC is subject to more fees and regulatory requirements than a sole proprietorship or partnership.
• When there is more than one member, the members are required by law to meet on a regular basis and record minutes of their meetings, but there are not many regulations that determine how the meetings are conducted or what is discussed.
• LLCs are not publicly traded and, oftentimes, there are stipulations in an LLC’s operating agreement prohibiting the use of investor funding. Therefore, is it difficult for an LLC to find investors to contribute to the growth of the business.

Corporations

Corporations allow for the contribution of investor funds to assist the growth of the business, with those “shareholders” taking a gain or loss in their contribution depending on the success of the business. There are two types of corporations: S and C corporations. An S corporation is restricted to 100 U.S. shareholders, while a C corporation can have an unlimited number of shareholders. In addition, in an S corporation, the corporation itself is not taxed, but, instead, all of the taxes are passed down to the individual shareholders while a C corporation faces the dilemma of double taxation. For more information regarding corporations, go to this blog written by The Service Corps of Retired Executives (SCORE), a nonprofit organization that provides mentoring services to new and up-and-coming business owners.

Pros of a Corporation

• Because the shareholders can buy or sell their shares in the company, it is easy to find investors for a corporation.
• The shareholders or investors hold the same protection as an LLC. The only money at stake to an investor is the money that they invested in the business. Personal assets are not at risk.

Cons of a Corporation

• Corporations are subject to many complex rules and regulations and must file many more documents, at both the state and federal levels, to exist.
• Taxes are complicated and will probably require an accountant who is experienced with corporate law.
• Corporations have strict laws regarding shareholder meetings, offices held within a corporation, and the keeping of minutes at such meetings.

These business structures are the same, regardless of where you live in the United States, but each state tends to modify the rules slightly when it comes to what needs to be filed in that state and the particular rules that govern each structure. The Small Business Administration can help you determine where to go in your particular state to get the information you need to get started.

Interested in tips that will help you start and run your microbusiness? My book, A Sure-Fire Microbusiness Guide: From Startup to Maintaining a Truly Small Business, is available for download. You can also order a print version on Amazon.