Before you start providing any services or earning any money with your small business, you want to ensure it is set up correctly both legally and tax wise. This is where the structure of your business comes into play.
You'll need to understand what kind of business structure you need to set up - Sole Proprietorship, Partnership, Limited Liability Company (LLC) or a Corporation. Things start to get a little confusing here!
Below are high level definitions of each:
In this business structure, you run the business alone and are personally responsible for all of the related liabilities.
In this structure, you run the business with a partner or multiple partners and the business is managed based on the agreement you set up. You and your business partner(s) are personally responsible for all of the related liabilities.
Limited Liability Company (LLC)
In this structure, you have limited liability (similar to a corporation), which means you have no personal liability for business debts and claims. You'll also have the flexibility in your management structure and ownership similar to a partnership. Owners in a LLC are called members.
Here, your business is a separate legal entity and only the entity itself is held legally responsible for any liabilities taken on. Owners are called shareholders. There are two different type of corporations, C corporation and S corporation and the main difference is the way each entity is taxed.
If you aren't sure what structure to choose thats perfectly fine. Your choice is not permanent. For example, if you start out as a sole proprietorship and your business grows and you want to reduce your personal liability you can always convert to an LLC or corporation. You just need to make sure you follow the government guidelines to do so.
If you are in the US, below are two invaluable resources that will you most likely need as you begin your small business journey. These resources go into a lot of detail regarding the business structures mentioned above including the pros and cons as well as the specific steps you need to take to set up your business under of these structures:
You should spend some time doing research on the different business structures, which one you'd like to set up and the related costs, legal and tax requirements of each.
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