Determining the Proper Business Structure

Are you an entrepreneur? You probably are even if you don’t think that term applies to you. Most of us have great ideas, and if we really put our minds to it, we could start up some amazing businesses that could radically change the world. Unfortunately, the organization, taxation, and all of the other complications that go along with starting a business are enough to deter most people. If you are interested in becoming a business owner, your first step is to do plenty of research. Your accountant in Billings, Montana explains the nuances of different business structures.

What is a Business Structure?

Basically speaking, your business structure will determine how your earnings are taxed. There are pros and cons to each of the different methods, and there will be several determining factors based on how much you plan to earn, what your business plans to do, and who you plan to market to.

Types of Business Structures

Sole Proprietorship – A sole proprietorship is the most basic way to set up your business is as a sole proprietorship. This method doesn’t involve any fancy ways to file with the state, it says that you own the company, and you own everything in the company. The issues here arise when trying to determine the business as an entity from you as a person. If something goes wrong, you as a person could be held responsible. This includes business debts; the business cannot file bankruptcy separate from the individual.

Limited Liability Company – A Limited Liability Company (LLC) is very similar to a sole proprietorship, but with one major distinction. It is organized in such a way as to provide the limited liability of a corporation, but the flexibility of a sole proprietorship. Each owner in an LLC (called a member) is responsible for their own share of the earnings and they are filed on a personal tax return; no business taxes necessary here. An LLC is a great structure for a small business that only plans to earn enough income for a single person.

Corporation (C) – A business can be incorporated two ways. A C Corp is a business that is owned by shareholders. However, the shareholders are not responsible for the business, but the business itself is responsible. Corporations are bigger and more complex, and often have costly overhead (including a lot of tax advisor and legal advisor fees). Most people just starting out will not want to start a C Corp.

Corporation (S) – An S Corp is similar to a C Corp in that it is structured as a separate entity apart from the owners (shareholders). But it has some distinctions. All of the profits in an S Corp are passed through to the shareholders, so the business itself is not taxed. This is great to avoid double taxation, but it also incurs lower limits of liability (the shareholders can still be held responsible).

For those just getting started in their business owning journey, these are the main types of business structures they will need to know about. Naturally there are more, such as cooperations, partnerships, and specialized structures for people like attorneys. But most people won’t have to worry about that. In fact, you don’t even have to worry about these basic types. You can learn more about all the business structures on the Small Business Administration page.

Your accountant in Billings, Montana can help you figure out which business structure to set up as. He can help you get all of the paperwork in order, and get everything filed with the state and city. This frees you up to pouring more time into your idea and building your new business.

Practical Taxes

Practical Taxes is a full service accounting firm in Billings, Montana. We can help with simple tax preparation, but we also do a lot with business consulting, payroll services, and much more. If you have any accounting needs, give us a call today at 406-894-2050.