All it takes is the gem of an idea for a person in Colorado to decide to take a leap and open their own small business. It is important not to rush into such endeavors without carefully thinking about how you want your business to operate and what you want your business to look like. One of the first step burgeoning small business owners need to take is to decide on a business structure. The following are three common business structures small business owners may be interested in.
A sole proprietorship for the single business owner
If you own and manage your business without any partners or co-owners, you may want to consider a sole proprietorship. In fact, a sole proprietorship is the default business structure for those who do not register their business as any other type of business. In a sole proprietorship you are personally liable for the actions of your business. This means that you may be financially responsible for your business’s unpaid debts or other obligations. A sole proprietorship may be a good choice for those who want to get their feet wet as a business owner before deciding on a more formal business structure.
A partnership for those opening a business as a team
If you have a business partner you will likely want to consider structuring your small business as a partnership. Two common types of partnerships include limited partnerships and limited liability partnerships. The difference comes down to liability. In a limited partnership one general partner has unlimited liability. The general partner pays self-employment taxes. The other partners generally have limited control over the business and have limited liability. The profits of the business go through all partners’ personal income tax returns.
In a limited liability partnership, all partners have limited liability. This means they are not responsible for the business’s debts or the acts of the other partners. The details of a limited partnership or a limited liability partnership are often laid out in a written partnership agreement.
Limited liability companies for those who have a riskier business or significant assets
If you are opening a high-risk business or if you have a substantial amount of personal assets, you may want to consider structuring your small business as a limited liability company. In an LLC you are not personally liable for the debts, obligations and actions of your business. However, business profits and losses will go through your personal income taxes, and you must pay self-employment taxes. Unlike a corporation LLCs do not have to pay corporate taxes. Some states require LLCs to dissolve and reform if a member leaves unless there is an existing agreement detailing how the LLC will handle the transfer of ownership.
Ultimately, the decision on what business structure to use will be based on your needs and goals. What may work for one small business owner may be different than what works for another small business owner. What is important is that you explore all your options for structuring your business so you can make decisions that are right for you and your business.