Why Deciding on Your Business Structure, the Right Way Can Set You Up for Long-Term Success

Now, I know many of you listening today have experienced the uncertainty of a layoff – and maybe, like I did, you’ve decided to take that leap and turn a challenging situation into a new opportunity. I did mine a long time ago which lead to a lot of success and that’s why I’m here, to share with you what works and what doesn’t. That way, you can take the short path to success!

One of the first and most important decisions you’ll face is choosing the right business structure. This decision can influence your taxes, liability, ability to raise funds, and even your overall stress levels. It may feel overwhelming, but trust me, this choice can make or break your long-term success.

In this article, I’ll guide you through everything you need to know about choosing the right business structure for your new venture and how to build your business with sustainability in mind.

Sound like fun? Okay, I know some of you are thinking – BORING. But getting baseline understanding of what you should do is really important So let’s jump in!

First things first: what are the different types of business structures?

In the United States, there are a few options to consider when setting up a business. You’ll often hear about:

Each of these structures has different implications for your personal liability, taxes, and ability to raise capital. Let’s break it down.

This is the simplest form. If you’re a solo entrepreneur, this may sound like an easy choice. You don’t have to file much paperwork, and all profits are reported on your personal tax return. However, the downside is that you’re personally liable for any debts or legal actions related to your business. This can be a risky move, especially if you plan on scaling.

An LLC combines the simplicity of a sole proprietorship with some of the liability protections of a corporation. As the owner, your personal assets are generally protected from business debts. Plus, it offers flexibility in tax reporting – you can be taxed as a sole proprietor or choose to be taxed as a corporation. An LLC is a common choice for many new businesses because it strikes a balance between simplicity and protection.

Corporations, whether C-Corp or S-Corp, offer the highest level of liability protection, which means your personal assets are shielded from any business-related lawsuits. However, they come with more complex regulations and higher administrative costs.

So, what’s the difference?

First off, both S-Corps and C-Corps are corporate structures recognized in the U.S., and they both give you limited liability protection, meaning your personal assets are typically safe from business debts. That’s a win for both.

But here’s where things start to differ: taxation.

This is the big one.

C-Corporation is the default corporation. It gets taxed as its own entity — meaning it pays corporate income tax on its profits.

Then, if it distributes dividends to shareholders, those dividends are taxed again on your personal return. That’s the famous “double taxation.”

Now, an S-Corporation is more of a special tax designation you apply for through the IRS. Instead of paying corporate taxes, profits and losses "pass through" to the shareholders’ personal tax returns. So you only get taxed once, at the individual level. That’s a major perk for many small business owners.

But of course, it’s not all roses.

You can’t have more than 100 shareholders

All shareholders must be U.S. citizens or residents

You can only issue one class of stock

They’re more flexible — no shareholder limits, and you can have multiple classes of stock, which makes them ideal for venture capital and going public.

Also worth noting: with C-Corps, you might have access to certain deductions and benefits, like better fringe benefits for employees — that S-Corp owners may not fully enjoy.

So to recap:

Want simplicity and avoid double taxation? S-Corp might be for you. For small businesses, this can be a good way to go. Just a little more paperwork.

Need to raise capital and grow big? C-Corp is probably the better fit.

If you’re going into business with someone else, you might consider forming a partnership. A partnership can be general, where both parties share responsibility for debts, or limited, where one partner has limited liability. While partnerships allow for shared resources, they can also lead to disagreements if not managed properly.

So, what should you consider when choosing your structure? Let’s dive into the key factors that will help guide your decision.

When starting a business, especially after being laid off, you want to protect yourself and your assets. If you’re personally liable for your business’s debts, your house, car, and savings could be at risk. That’s why many people opt for structures like LLCs or corporations – they shield your personal assets from business liabilities.

Taxes are another major factor to think about. Sole proprietorships and partnerships typically have pass-through taxation, meaning the business income is taxed on your personal tax return. But LLCs and corporations have different tax treatments, and it’s crucial to understand which structure allows you to pay the least tax while still meeting your financial goals.

For instance, an LLC can choose between pass-through taxation and corporate taxation, whereas a corporation, especially a C-Corporation, is taxed separately from its owners. However, S-corporations let earnings pass through -, eliminating the potential for double taxation. If you’re uncertain about what makes sense for you, consulting with a tax professional is always a good idea.

If your goal is to scale your business and attract investors, your business structure will be critical. Investors typically prefer corporations because they are familiar with the structure and how equity works within it. Corporations, especially C-Corps, allow you to issue stock and bring on multiple investors. LLCs can also accept investments, but they tend to be more restrictive in terms of ownership transfer and profit-sharing.

The more complex your business structure, the more time and money it will take to maintain. Sole proprietorships are the easiest to manage and maintain, whereas corporations come with higher administrative costs and requirements like annual meetings, minutes, and detailed record-keeping.

If you want to keep it simple and focus on building your business, an LLC is often a good choice. If you want the highest level of liability protection and tax advantages for a small business and don’t mind a little extra paperwork (and I mean a tiny bit more each year), the Sub-S Corp is a great way to go.

Keep in mind the state. Which you file for your company entity will also make a difference. Some states have higher fees and Treat company structures differently. Knowing your state rules can make a difference. For instance. If you file in Delaware as an LLC, they can have great privacy rules, but they're very expensive and can be complicated to deal with overtime. Whereas if you file as a sub-S corporation or an LLC in Kansas the working relationship might be much easier. Knowing your state rules matters

 

Choosing your business structure is just the beginning. Once you’ve made your decision, the real work begins. Here are a few tips to set your business up for long-term success:

Your business needs a solid foundation to grow. This includes a business plan, a clear understanding of your target market, and realistic financial projections. You should also choose a name, register your business, and get any necessary licenses and permits.

It’s essential to separate your personal and business finances. Open a business bank account, use accounting software, and track your expenses. This will help you stay on top of taxes and make it easier if you ever need to apply for funding.

Insurance is another important factor in protecting yourself and your business. Whether it’s general liability insurance, professional liability insurance, or workers’ comp, make sure your business is covered. This is especially important if you’re in an industry where lawsuits could be a risk.

You might not think about it now, but as your business grows, you’ll need to think about scaling and transitioning. This could mean hiring employees, expanding to new markets, or even selling the business. Having a clear plan for the future will make these transitions smoother.

Starting a business after a layoff can be an exciting, but nerve-wracking, experience. The choice of business structure is one of the most important decisions you’ll make, so take the time to evaluate your options carefully. By choosing the right structure, you’re setting yourself up for financial protection, tax benefits, and future growth.

And remember, your business structure isn’t set in stone. As your business grows and evolves, you can revisit your choice and adjust. But choosing wisely at the outset can save you headaches and complications down the road.

I hope this article helps you navigate your entrepreneurial journey with more clarity and confidence. If you’re unsure about the right structure, consider consulting with a lawyer or accountant – it can be an investment in the long-term success of your business.

In our membership at LifeByDesign360 Insider Academy and Community, you’ll find helpful resources for creating your business the proper way right under Apps, Best Resources, Business Launch. Look for Legal Forms and Contracts and you’re on your way.

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