One of the first steps in starting a new business is deciding what entity type the business will be. This is the structure of the business, not what goods or services it will offer. This decision is very important for aspiring business owners, as it will influence day-to-day operations, taxes, liabilities, and even the process of applying for a loan. Three of the most popular business entity structures are sole proprietorships, general partnerships, and limited liability companies. Some pros and cons of each are described below.
In the U.S., 73% of all small businesses are sole proprietorships. This is a business formed, managed, and controlled by one person. The formation involves no necessary legal action with the Maine state government.
• Business owners only need to obtain any required local licenses and permits in order to get started. The Maine Business Answers section of the State of Maine website lists the permits and licenses required. Or entrepreneurs can call (800) 872-3838.
• Tax preparation is simplified. There is no legal separation between the business owner and the business, so all business income is reported on the owner’s personal tax return. This is known as pass-through taxation.
• Sole proprietorships are often easier to manage than other entity types, with no other owners, stakeholders, or board members to consult when making decisions.
• The sole owner is responsible for all of the debts and liabilities of the business. For example, if someone wins a lawsuit against the business, the owner’s personal assets could be taken to settle the debts.
• Getting business loans can be difficult.
Partnerships are very similar to sole proprietorships, however a partnership has two or more owners. There’s no legal action required to start a partnership in Maine, making these easier to open than most other business entities.
• Business owners only need to obtain local licenses and permits in order to get started. The Maine Business Answers section of the State of Maine website lists the permits and licenses required. Or entrepreneurs can call (800) 872-3838.
• Partners divide the profits and losses, which means no single person faces financial adversity alone.
• The business’s income is divided and reported on each of the partner’s tax returns equally, simplifying the filing process.
• Disagreements can cause the business to fail. It’s important to set up a partnership agreement to formalize how profits are split, how disagreements are handled, and to detail any other important business logistics.
• Like a sole proprietorship, the business partners are responsible for all of the business’s debts and liabilities.
• Getting a business loan can be difficult.
Limited Liability Company (LLC)
For aspiring small business owners who want the flexibility of a partnership or sole proprietorship, but want the liability protection or a larger organization, an LLC may be a good choice.
• One of the major advantages of an LLC is that it protects business owners from personal liability – meaning the owner’s vehicle, home, savings accounts, or other assets won’t be at risk if the LLC faces bankruptcy or lawsuits.
• The separation of the company from the owner(s) increases credibility.
• In addition to local licenses and permits, an LLC needs to be registered with the state. This entails a number of filing fees. For a full list of required forms and fees, call (800) 872-3838.
• LLCs require more maintenance and regular costs.
For a full list of all business entity types, entrepreneurs can visit the business structures page on the IRS website.