The retail business entity you choose can have legal, financial, and operational implications on your business.
Consider these factors when choosing a business structure:
- Liability protection
- Flexibility for future expansions
- Level of control you’d have over the business
- Tax benefits
- Complexity of formation
Based on these factors we’ll look at three common business entities and what each offers.
1. Sole Proprietorships
Businesses that involve sole owners, self-contractors, handicraft businesses, and consultants who want full control over the business thrive under the Sole Proprietorship business entity.
The profits of a Sole Proprietorship business are taxed at the personal income tax level.
In addition, there is no government involvement in this business structure. It makes Sole Proprietorship formation one of the easiest and most affordable retail business entities.
If you choose this business entity, brace yourself to take responsibility for any lawsuits or debts the business may incur. Your personal assets can be seized to pay off business debts.
If you hope to open multiple stores or a franchise in the future, then a Sole Proprietorship is not for you.
These are business entities that are distinctly separate from their business owners. They are a “legal entity” that can sue and be sued, secure funding, get into contracts, and pay taxes.
With Corporations, you never have to worry about losing your personal assets to pay off liabilities owed by the business.
You can open as many stores as you need under the Corporation, issue shares, and go public.
However, be prepared to pay corporate taxes and deal with lots of paperwork. You’ll also need to adhere to formalities and protocols like annual general meetings, record maintenance, and the appointment of a board of directors.
3. Limited Liability Companies (LLC)
If the rigid requirements of Corporations and the lack of personal property protection of Sole Proprietorships bug you, an LLC combines some of the best benefits of the two entities.
With an LLC, there are no corporate taxes. You can pass profits and losses of the business to your personal income tax returns, just like a Sole Proprietorship. You will, however, need to pay a self-employment tax.
Your personal assets are protected from the liabilities of the business, just like in a Corporation.
The formation process of an LLC is easier than that of a Corporation but a little more complicated than that of a Sole proprietorship.
One drawback of an LLC is that you can’t take it public or distribute shares.
You can learn more about Sole Proprietorships, Corporations, and Limited Liability Companies in the infographic below by GovDocFiling.
Use it to assess your present and future business needs against the strengths and weaknesses of each entity to make an informed decision.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.