For many new entrepreneurs, choosing a small business structure can be a very confusing and uncertain time. Indeed, these options are oftentimes complex, and there is no “one size fits all” solution to the issue of finding a model for any businesses because each is unique and comes with its own requirements which must be met in order to become successful. One of the most important aspects one should consider when making this decision is how the structure in question will impact the business (and the owner of said business) when it’s time to pay taxes.
Though there are many owners who will avoid creating a nonprofit organization simply because they cannot draw a profit, those looking to serve a cause will find that the tax benefits for this small business structure are great. In fact, these businesses are entirely exempt from taxes. However, creating one of these businesses can be rather difficult. There are many strict requirements which owners must follow, one of which involves an application for the status of nonprofit to be filed no more than 15 months after the business’s founding, which places a rather large strain on the young business in question.
Creating a corporation is another option that is popular amount entrepreneurs of all industries. If opting for this small business structure, an owner has two options: C corporations or S corporations. With a C corporation, the owner can claim more business related expenses than any other structure, but are in turn susceptible to double taxation if they sell shares to investors. By creating an S corporation, an owner can avoid double taxation, but may have no more than 100 shareholders at any given time, which severely inhibits the growth of the business in question in many cases.
A sole proprietorship is a great option for a small business owner who is running things by themselves. Because this type of business arrangement only has one owner, decision-making is simple, and overall this is the easiest structure when it comes to setup. Filing taxes for this option is simple as well. Instead of filing through the business, the owner simply files the necessary figures with their own income each year, along with any relative forms. However, because the ownership of the company rests on a single person’s shoulders, so do all responsibilities involving taxes, production and legal fees which might occur.
As a smart entrepreneur, gathering all information possible before making a decision is crucial to making wise business decisions. Speaking with a professional about these and other options can ensure that you select the small business structure best suited for your new business endeavor.