Starting Your Own Business - Structure - Sole Proprietorship, LLC, LLP, C Corporation, S Corporation
- Apr 28
- 7 min read
Starting a new business can be rewarding and a struggle not knowing how to legally set the business up, resources, research, and requirements. Most new business owners have the heart, determination, vision, and industry experience, with no or little organizational knowledge.
When starting a new business there are a few steps needed for planning, comprehension, and structures.
Step 1:
Build on an original idea. Take your time with the layout and planning process. This could take 1-10 years, before the planning and processes are solid enough to move forward.
Remember, there will always be adjustments and changes made before the business is ready to open.
Two types of Business Plans:
Type 1: A thorough business plan provides a clear picture to the new business owner of the layout, finances (profitability or needs work), structure (type of business LLC, LLP, C corporation, or S corporation), products and services offered, number of employees needed and if you can financially afford employees, the theme of the business, the research for targeted customers, the need for your type of business, if you own or rent the building of the business, layout of the inside and outside of the business to see a clear picture (some states require a blueprint, before opening the business), location of the business, and your plan “B” if your business fails. This business plan is approximately 25-40 pages.
Type 2: This business plan provides information for a bank or loan company. It summarizes the information in the “Type 1” business plan. It is approximately 10-15 pages. Banks and loan companies don’t want to read a long business plan. They only look for the what products and services you are offering, if the business is profitable and research that makes sense for the area your business is located, the type of customers you targeted, location, your plan “B,” if your business fails, and how you plan to pay back the money you borrow.
Having a well thought out plan along with a plan “B” is important before you do anything else. Do not jump in with both feet without these things. Most businesses fail within the first five years without a plan, structure, experience, and a plan “B.” Once you have completed the planning, set up your structure.
Step 2: Seek the advice of someone more experienced such as an accountant (CPA) or attorney. You need to set up the type of company and either Articles of Incorporation for an LLC or LLP or Articles of Corporation for a C corporation or an S corporation business type. The articles provide the organization of the business such as the president, vice president, owner, co-owner, secretary, and so on. The state requires the articles to be filed annually. There is a fee each time you file.
There are filing fees to set up your company and another fee to set up the articles for your business structure. The fees vary depending on the state. You will also be charged by your accountant or attorney to set this up.
For example: In Indiana, setting up an LLC costs $95 as a one-time filing fee for the Articles of Organization or $100 to set up an LLP. Additionally, an annual report filing fee of $32 is required each year to renew, update, or change information. There is also an optional name reservation fee of $10.
The simplest way to set up a business structure is a Sole Proprietorship. This is a business owned and operated by a single individual, with no legal distinction between the owner and the business. The owner is liable for all debts and obligations of the business. The owner receives all profits from the business. This structure is unincorporated, meaning the owner is not legally separate from the business entity and not protected by a corporation. It is a straightforward way to start a business with minimal administrative requirements.
A Sole Proprietorship structure means the profits from the business are taxed as personal income on their personal income tax return. The owner has complete control over the business and all of its decisions. They can make changes to the business structure and operation without needing approval from other partners or shareholders. Starting a Sole Proprietorship only requires a business license and potentially a DBA (Doing Business As) registration if operating under a different name other than their own personal name. For example: Tim Jones runs an auto body shop. The shop’s name is Quick Fix Auto. Quick Fix Auto is the DBA name that needs to be registered with the state.
An LLC (Limited Liability Company) and an LLP (Limited Liability Partnership) are both business structures that offer limited liability protection, meaning owners are not personally liable for the business's debts and obligations. However, they differ in several key aspects, including ownership requirements, management structure, and tax implications.
An LLC (Limited Liability Company) can be set up as a sole proprietorship or a partnership. For example: A husband and wife can both be owners as a partnership and file taxes jointly. Otherwise, the business partnership is an LLP, and individual partners file their taxes separately.
Key Differences:
Ownership:
LLCs can be owned by one person or multiple members, while LLPs typically require two or more partners.
Management:
LLCs offer more flexibility in management, allowing for manager-managed or member-managed structures. In an LLP, management is shared equally among partners, though the partnership agreement can specify otherwise.
Taxes:
LLCs have flexibility in how they are taxed, allowing for pass-through taxation or corporate taxation.
LLPs are typically pass-through entities, meaning profits and losses are reported on the partners' individual tax returns.
Liability:
Both structures provide limited liability, but the scope can differ. In some cases, an LLP may offer less comprehensive liability protection than an LLC, especially regarding contractual debts.
Cost:
LLPs have lower initial filing fees and ongoing maintenance costs compared to LLCs.
LLCs offer greater flexibility in ownership, management, and taxation, making them suitable for various business needs.
LLPs are often preferred by licensed professionals like lawyers and accountants, who may be required by state law to form a partnership.
These two types of business structures are the most common with sole proprietors and small businesses.
Other business structures are a C Corporation or an S Corporation. The C Corporation is more suitable for larger companies planning to raise significant capital, or businesses anticipating a public offering. The S Corporation is favored by small businesses and entrepreneurs who want to avoid double taxation and keep their business structure simple.
C Corporation:
Pays corporate income tax on their profits, and shareholders pay income tax on the dividends received. This structure is easier to form than an S Corporation.
This structure can have an unlimited number of shareholders and diverse ownership structures. There is flexibility in issuing various stock classes, which can be beneficial for raising capital.
S Corporation:
Avoids corporate-level taxation. Profits and losses are passed through to shareholders and taxed at their individual income tax rates. This structure requires an election with the IRS to obtain “S Corporation” status.
This structure has limited ownership restrictions (100 shareholders) and has U.S. citizenship requirements for shareholders. It has only one stock class.
If you choose to operate as a corporation, you will not be taxed on the income of the corporation. However, depending on the type of corporation you choose to operate, you could be subject to double taxation. A C Corporation is taxed on its earnings, and you are taxed on all payments you get from its dividends. As an S Corporation you may avoid any double taxation issues. The advantages of a corporation are, as a shareholder, you will usually not be liable for the corporation’s debts beyond the amount which you have invested in the corporation, unless you personally guarantee the debts or other obligation s of the corporation.
Both the C Corporation and S Corporation provide limited liability protection, shielding shareholders from personal liability for business debts and obligations.
It is important to establish a good relationship with a local bank or loan company after deciding whether to operate as a sole proprietorship, partnership, LLC, or corporation. This will provide you with a valuable source for obtaining loans, cashing customer checks, banking concerns, and financial advice. Keep in mind financial institutions want your business to succeed, providing them with assurance that your loan is repaid and to offer you other financial services. Banks and loan companies normally request the business owner guarantees the debts of the business, so don’t be upset if they ask you to take a security interest in your business investment in the form of assets of the business instead of a personal guarantee.
Before finalizing a loan, shop around. Different banks and loan companies offer different rates of interest and have different policies and procedures. Some loan companies such as Farm Credit offer annual dividends that you might receive for being a loan customer.
Your credit rating is extremely important. The higher the credit score, the better chance you will have to qualify for a loan, especially if your business needs to expand, needs to purchase new equipment, or hire employees.
An individual starting a business should seek assistance from the Small Business Administration (SBA), SCORE, and local organizations such as the Chamber of Commerce. They will assist you in the organization of your business to prepare your business plan and help you determine if there is a need for the products and services you want to offer. They will help you look over your investment and advise you of the risks.
Another important idea to consider is leasing equipment versus purchasing equipment. Leasing equipment can be extremely beneficial to your tax deductions immediately, where purchasing equipment is deferred over several years.
When making business decisions, especially if it involves money, think about how the business will benefit and if the business can afford to buy the equipment needed or hire employees now, or if its business smart to wait until next year or next month.
The same thought process should be wages. Is it better to pay staff weekly, bi-weekly, semi-monthly, or a monthly salary? Wages also depend on the law requirements set by your state. Keep in mind if you let an employee go, there are unemployment compensations to pay. If the employee is injured, the workers' compensation is another cost. There are costs related to training and retraining if employee retention is a problem. Is it better to keep an existing employee and work with them to become a better employee or train a new employee?
Success is based on smart business decisions and the needs of the business.
Thank you for reading this article. I hope you found the information valuable and informative for your business. Please check back to read other articles and share the posts with others.
S.R.R. Business Services
Marietta Smith
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