A small business can be a number of structures like a sole proprietorship, a limited liability company (LLC) or a corporation. The entity that you choose will impact things like your business name, your liability, and how you file your taxes.
After choosing your initial business structure, and after you reevaluate you can change your structure as the business grows.
A sole proprietorship costs nothing to establish, but offer no protection whatsoever. Sole proprietorship is when a person does not form a business entity and they operate their business as themselves. In the eyes of the law, you are your business in a sole proprietorship. This can be a risky setup because if your business is sued then you are personally responsible for all of the debts and liabilities. This means your personal assets like your home, cars, and bank accounts are at risk of being used to cover those debts. An advantage through this, is called pass-through taxation. Sole proprietorship income pass this through right to the owner’s individual tax return, this means no corporate tax return and no double taxation. These are also a lot easier to set up and have flexible management.
LLC’s, Limited liability company, are the best business structure for majority of entrepreneurs. You get the best of both worlds between a sole proprietorship and a corporation. It is a legal entity used to run a business or used to hold assets like real estate, boats, or aircraft. The owners of an LLC are called members. An LLC can be owned by 1 person, a single member LLC, or 2 or more people called a Multi-member LLC. An LLC is a business structure, designed specifically to protect your personal assets from the liabilities of the business. An LLC provides liability protection, your personal assets are protected against creditors, offered pass-through taxation and may avoid the double taxation.
A corporation is a legal entity and most often used to run large companies with shareholders. After forming a corporation, you have to elect a board of directors to oversee the company and have to elect corporate officers to execute and run day-to-day business. A corporation is best suited for companies that want to go public on the stock market via an Initial Public Offering (IPO). Corporations are required to hold annual meetings, record all meeting notes and issue shares to the stockholders. A disadvantage of a corporation is the double taxation, the corporation must pay taxes at the federal level and then the owners must pay taxes again on their dividends, on their individual tax returns. The advantage, however, is liability protection, the owners are protected from the debts and liabilities of the business. For an entrepreneur, this would be quite complex and costly to maintain just starting out.
Sources: https://www.llcuniversity.com/llc-vs-sole-proprietorship-vs-corporation/ and https://www.thebalancesmb.com/starting-a-small-business-4161641
COM110_madison 