Starting and running a small business can indeed be hard. However, it is encouraging to recognize that every big business started as a small enterprise. A critical step is setting up your business using the right legal structure.  

Why it is Critical to Choose the Right Business Structure 

When setting up your business it is critical to choose the right business structure because that influences many things including your day-to-day business operations, how much you pay in taxes, your ability to secure financing, and your personal liability.

Common Business Structures 

A business structure is simply how it is created legally. Your structure will identify who owns the enterprise, how profits of the business will be distributed, how it will be taxed, and what roles will perform which legal tasks. The different business structures include: 

  • Sole proprietorship. This is a company that is directly linked to the person who owns it. There is legally no distinction between the person who owns the business and the business itself. 
  • Partnership. This is the same as the sole proprietorship except for more than one owner. 
  • Limited liability company. A limited liability company creates a legal distinction between the enterprise and its owners. It features flow-through income taxation, where the business’s income is taxed as part of the owner’s income tax filing. 
  • Corporation. A corporation is defined as a legal entity separate from its owners. Corporations are substantially more structured than the more personal forms of structure. They can be bought, sold, or transferred by using the exchange of stock. Note that there are various types of corporations including C corps and S corps.

It is reported that there are about 21.6 million LLCs in the United States, compared to about 23 million sole proprietorships, and 1.7 million C-corporations.

The Benefits of Establishing an LLC 

The benefits of creating an LLC include protecting the owner’s personal assets from his/her company’s debts and liabilities. An LLC is inexpensive and easy to form. Because an LLC is a pass-through taxation entity, the tax advantages are that the profits are taxed at the owner’s personal income tax rate instead of the corporate tax rate. Further, there is great flexibility with LLCs management organization, recordkeeping and reporting requirements, and profit distribution.

Tips for Starting an LLC 

Use these tips for getting your LLC started: 

  1. Choose a name for your LLC that is in compliance with your state’s rules. 
  2. Designate a registered agent to represent the company. 
  3. Prepare and submit the required articles of organization form which will include the names of the LLC owners, the physical address of the LLC’s principal office, and the LLC name. 
  4. Decide whether the LLC will be manager-managed or member-managed. 
  5. Create an LLC operating agreement. 
  6. Comply with all tax and regulatory requirements. 
  7. File your annual reports on time. 
  8. Keep your LLC active.                                                                                                

Seek Professional Accounting Assistance 

Contact Nolan Accounting Center, based in Greenfield, WI. We build strong relationships and support strategies for success. We provide accounting, tax preparation, bookkeeping, and payroll services to small business owners in Southeast Wisconsin including Milwaukee, Greenfield, New Berlin, Muskego, West Allis & Waukesha.