Sole proprietorship, LLC, partnership or cooperative — each of these small business structures has different tax and legal implications. To choose the right one for your business, you need to understand the pros and cons of each.
Sole Proprietorship
On the plus side, sole proprietorships are simple and relatively inexpensive to form. They offer owners complete control when it comes to running the business, and tax reporting is simplified because sole proprietors can report business earnings along with their personal tax return. Another big plus is that tax rates for sole proprietors are lower than for other business structures.
Sole proprietorships are not without their drawbacks, however. Because there’s no separation between the business and the person who owns it, owners are responsible for all debts and liabilities.
Limited Liability Company
In a limited liability company (LLC) structure, members of the business benefit from some separation from the business. So if the LLC business was sued, the owners’ personal assets would be exempt. Members of the business can share profits however they see fit, and compared to other business structures, the LLC requires less paperwork to register.
There are some negatives to consider. For instance, if a business member leaves the LLC and other provisions have not been made, the business dissolves and any remaining members have to officially close the business and decide whether or not to start a new LLC. The tax burden increases as well, as self-employment Medicare and Social Security contributions are required.
Partnership
If more than one person claims ownership of the business, then members cannot create a sole proprietorship. They may instead elect to create a partnership. Partnerships are relatively easy and inexpensive to form. In addition, having multiple owners can bring greater financial resources to the businesses, and owners with complementary skill sets can increase the chances for business survival.
Partnerships, however, do not offer legal protection. As with the sole proprietorship, the owners of a partnership are all responsible for the business’s debts and liabilities. And, if the partners don’t see eye to eye, it can be difficult to reach compromises when it comes to operating the business and choosing its overall direction.
Cooperative
Cooperatives are different from the previously mentioned structures in that they are owned and operated by the members the business serves. One advantage of this structure is that members of the cooperative can come and go without dissolution of the business. Another plus is the democratic way most cooperatives are set up. With each member getting a vote, there is no opportunity for any one member to dominate business decisions.
Cooperatives can find it difficult to obtain cash from investors who want to take part in a business setup where larger contributions translate to more influence and authority in business decisions.
The type of business and number of initial organizers will help you determine which of the above business structures is the right one for your startup. For larger, more complicated businesses, you may also need to research S Corporation and Corporation structures.
