Choosing the Right Business Structure for Your Entrepreneurial Style

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In its recent study, The Entrepreneur Next Door, the Kauffman Foundation indicates that entrepreneurship is as widespread in the United States as getting married or having a baby.  More than 10 million U.S. adults are actively engaged in creating businesses, often with a friend or colleague. With lay-offs and corporate downsizing filling the news, no wonder sources as mainstream as USA Today and MSN are recommending entrepreneurship as the new corporate lifestyle.

More than 10 million U.S. adults are actively engaged in creating businesses…

Laid-off and downsized workers are “making lemonade.”  Instead of sending resumes, they are investing in themselves by starting businesses or purchasing franchises. Gladys Edmunds, USA Today, says it best—when you leave your job, you take with you the skills and talents that you own—plus the experience you got during employment. Many choose to become consultants or independent contractors in familiar industries. Others take transferable skills like salesmanship or project management and apply them to new ventures.  Some use their newfound freedom to turn a hobby into a profit center.

Whichever entrepreneurial direction you choose, select a business structure that works for you and your family. Many businesses start as sole proprietorships or partnerships. However, these structures have unlimited personal liability for company debts. As a result, many business owners opt to incorporate or form a limited liability company (LLC) to protect their families and financial interests. Businesses may change structure at any time.  Here are the most critical items to consider when selecting—or re-selecting—your business structure.

1. Protection of personal assets— Sole proprietors and partners have unlimited personal liability for business debt or law suits against their company. Creditors can attach homes, cars, savings or other personal assets. Incorporating or forming an LLC helps separate your personal identity from your business identity. Corporation shareholders or LLC members have only the money they put into the company to lose.

2. Pass-Through Taxation— For sole proprietors and partners, company profits/losses pass directly through to their personal tax returns. For corporations, profits are taxed, then the profits that are distributed to shareholders as dividends are taxed again on the personal level.  This “double taxation” can be avoided while still enjoying the benefits of personal asset protection by forming an LLC or by electing an S Corporation. S Corporations and LLCs can be taxed just like partnerships.

3. Uninterrupted business— Sole proprietorships and partnerships may automatically end or become legally entangled when one owner dies or retires.  Corporations and LLCs are enduring legal business structures. They may continue regardless of individual officers, managers or shareholders. Corporation ownership may be transferred, without substantially disrupting operations, through sale of stock.

4. Access to Capital— Sole proprietorships and partnerships may find investors hard to attract because of personal liability. Investors are more likely to purchase shares in a corporation where they can separate personal and business assets.

5. Credibility with vendors and customers— Adding “Inc.” or “LLC” to your company name helps your business seem larger and more established!

Article courtesy of SCORE.

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SCORE is a nonprofit association dedicated to helping small businesses get off the ground, grow and achieve their goals through education and mentorship.