I’m no mind reader, but I’m going to go out on a limb and assume you’re an established business owner. Congrats! A common question that has perplexed even seasoned entrepreneurs for a long time is: “Which type of LLC is the right fit for my business?” Let me simplify this for you so you can focus on building iron-clad acquisition systems and growing a strong company.
But before we dive into all the goodness, I’ve got to make my lawyer proud . . . This article is purely educational. My knowledge of this stuff is extensive, but I’m not offering personalized legal advice. There are numerous factors to consider when you’re selecting a business entity. So after you give this guide a read, you’ll want to consult with a pro who can assess your unique situation.
Okay, legal jargon is out of the way. So let’s get back to business. There are five main entity structures you need to know about to make the right decision for yourself and your company:
- Sole Proprietorships
- S Corporations
- Limited Liability Company (LLC)
I’ll define each—in a way that makes sense—but I want to point out that LLCs (#5 on the list) can be taxed as one of the four listed above. And that means you have choices! Feeling confused yet? Don’t worry. Lightbulb moments incoming . . .
Sole Proprietorships: You and You Alone
Many people start a sole proprietorship without even knowing it. Let’s say you were the neighborhood superhero who wrangled the kids to join your “carnival” back in the day. Your entrepreneurial spirit (even as a little tyke) was alive as you charged a whopping $0.25 for the ring toss. Without knowing it, you created a sole proprietorship. Cha-ching!
This entity type means that you and your business are like two peas in a pod. There’s no difference between you as an individual – and you as a business owner. As exciting as it is to be your own boss and run the show (or circus!), there are important factors to keep in mind.
Because you and your business are inseparable, any liabilities your business encounters will flow right back to you as an individual. So if your business gets sued, guess who’s on the hook? Yep, you guessed it: You are . . . and that could really mess with your future carnival endeavors.
Partnerships: Dynamic Duos
Now, let’s say I wanted to join your superhero status and take this carnival on the road. We could become partners and be in it together, taking on the business and any liabilities that come with it. Sounds fun, right? It can be, but there are a few critical elements for both of us to understand before jumping into that ball pit.
When it comes to being a partner, the amount of liability you bear can depend on your ownership percentage. So if you own 50% of the business, you’ll be responsible for 50% of the liabilities. Keep this in mind when you make any business decisions. And you already know this, but I’ll say it anyway: You need to have a rock-solid agreement with your partner. (Psst! Always get it in writing.)
There’s also an entity called a Limited Liability Partnership (LLP) which allows some partners to have less exposure to the risks and liabilities of the business. We won’t go too deep into that right now. Just know that if you’re considering becoming a partner in a business, it’s important to understand the potential liabilities and how they may be divided up.
Corporations: The Empires
You’ve heard of corporations. They’re the big players on the stock exchange, with that fancy “Inc.” after their name. But what does it all mean? A corporation is a legal entity that’s separate from its owners. The corporation can take on liabilities and generate income on its own, without affecting the personal finances of its owners or shareholders. If you’ve set up your corporation correctly, you’ll be as untouchable as a superhero with a force field—and the liabilities of the owners will be nothing but a mere mortal memory.
Corporations can be taxed in one of two ways:
When a corporation is taxed as an S Corp, the business’ income passes through to the shareholders and they’re responsible for paying the taxes on it. Income can be separated into W2 income and distributions, which can have different tax deductions depending on how the company is set up.
The tax benefits and savings of an S Corp can make you feel like that carnival-master superhero you once were . . . but don’t forget that with great power comes great responsibility. Make sure you’re keeping everything within the ratios that the IRS regulates to avoid any serious penalties.
A C Corp is a type of corporation that has to pay taxes on their income, and the shareholders have to pay taxes on the distributions they receive. Enter the term “double taxation.” (Cue the scary music . . . Dun dun dun!) But get this: While it sounds like a lot of taxes, there are ways to work within that structure to minimize—and even save!—come April.
I also need to shine a spotlight on this important detail: C Corps require bylaws and annual meetings. These are fancy ways of saying there are rules and regulations to follow. And if you don’t follow them, trouble could be looming. That’s because if something goes wrong with the corporation, its liabilities could become your personal liabilities (and nobody wants that, right?).
LLCs: The Perfect Blend
The final entity to cover is LLCs. They offer the best of both worlds—the protections of a corporation without all the stuffy regulations that come with it. You can keep things simple while still protecting yourself and your business (and those carnival customers!).
LLCs offer tax flexibility. By default, you’ll be taxed as a Sole Proprietor. All your income flows through to you. But if your LLC has multiple members (not shareholders), you can choose to be taxed as a Partnership, instead. If you’re ready to advance your tax game, an S Corp or C Corp can be the ultimate power-up to save you some serious coin.
But listen to this! It’s crucial that you don’t personally guarantee anything for the business or sign as an individual. You can sign . . . but do it as a member. Follow the rules and regulations set by your state to avoid any nasty surprises. You don’t want your business and personal assets to get too cozy—keep them separate to avoid any legal landmines.
Overall, LLCs are a great option for business owners ready to uplevel. Maybe you’re interested in offering more services and quickly expanding your client list or you need more predictable monthly revenue. Growing is awesome—but so is protecting yourself and your business. LLCs can help you do that without the hassle that comes with Corporations.
Next Step: Massive Growth
Choosing the right entity structure for your business is crucial to building and scaling a business successfully. Sole proprietorships, partnerships, corporations, and LLCs are all viable options, each with benefits and potential drawbacks. Consulting with lawyers, tax pros, and business development experts will help you determine the best fit for your unique circumstances.
My team is here to help you—or dare I say, be your superheroes. We’re even open to reminiscing about the good ol’ days of balloon tosses and putt-putt. But in all seriousness, we’re all about empowering you to protect your assets, implement proven acquisition systems, and lock in consistent revenue. Book some time with us so we can deep dive into your business and offer a path forward.