Business Building Business Plan Planning

How to choose a Business Structure

One of the first things you need to consider is what legal structure your business will have, which will have an impact on how you pay taxes to the state and the federal government and your liability. There are several options each with benefits and difficulties. It is always best to consult with a lawyer to determine which legal structure is best for your unique circumstance. You can also gather more information from your local business associations.

The options are Sole Proprietorship, Partnership, Corporations, S Corporations, Cooperative, and Limited Liability Company or LLC. Corporations and S Corporations are generally for larger, established businesses with multiple employees so we won’t go over those here.

Sole Proprietorship

The simplest business structure is the sole proprietorship.  A sole proprietorship is owned by a single person and you own and are responsible for its assets and liabilities.  There is no special paperwork required to start a sole proprietorship, simply by engaging in business you are acting as a sole proprietor. For all intents and purposes, you are your business.  A life coach who intends to work alone may find a sole proprietorship the easiest method of starting their business.

Pros:

  • A sole proprietorship is easy and inexpensive to start.
  • You have complete control over all business decisions.
  • Taxes are simpler because the business taxes do not need to be done separately from your personal taxes.

Cons:

  • You are entirely responsible for the debts and liability incurred by the business and if you hire employees you are liable for their actions in addition to your own.
  • It can be difficult to raise money to build or expand your business because you can’t sell stock. Banks are also hesitant to loan money to a sole proprietorship without significant collateral.
  • The business does not exist as a separate entity that can be sold although its assets can be sold to another person. For example, if you bought a building then you could sell the building when you closed the business.

Partnership

A partnership is exactly what it sounds like, a single business owned by two or more people. There are different types of partnerships that depend on how the partnership agreement is structured. For instance, a General Partnership divides profits, liabilities, and responsibilities equally among the partners. As with the sole proprietorship, taxes are included on the partner’s personal tax returns.

Pros:

  • Partnerships are easy and inexpensive to start.
  • Sharing responsibility and resources can allow each partner to bring their strengths to the business and increase the startup money and or credit available to the business.
  • Taxes are simpler because they are filed with the partner’s personal taxes.

Cons:

  • All partners are liable for the business debts and the actions of the other company.
  • Partners must work together to make decisions for the business and disagreements can be problematic.
  • Depending on the structure of the partnership profits are shared equally, regardless of contribution.

Limited Liability Company or LLC

A limited liability company (LLC) can have one or more partners referred to as members. An LLC provides some of the liability protections of a corporation with far less paperwork. It is taxed as a partnership or sole proprietorship with profits and losses being reported on the member’s personal tax returns. An LLC also allows more flexibility in profit sharing among partners.

Pros:

  • Less complicated and less costly than setting up a corporation.
  • Taxes are simpler because they are filed with the member’s personal taxes.
  • Limits liability for business debt and being sued.

Cons:

  • The business is not seen as a separate entity and dissolves when the final member leaves the business.
  • Members of an LLC are not employees but are considered to be self-employed and their net income is subject to self-employment taxes.

Cooperative

A cooperative might be a useful business structure for a group of coaches who wish to work together to pool resources to purchase a building for office space and split the many costs of doing business such as maintenance, advertising, utilities, reception staff, and cleaning costs while still maintaining their own distinctive practices.

Pros:

  • There are some tax advantages to a cooperative, speak with an accountant or CPA for more information.
  • Like an LLC, a cooperative allows a group of people to pool resources for opening and expanding a business.
  • Continues to exist as members come and go within the cooperative.
  • Decision making is done by democratic vote, with each member getting one vote.

Cons:

  • Management of cooperative requires member participation to be successful.
  • Some investors may be reluctant to buy into the coop when the amount of their investment doesn’t buy them more authority.

Helpful Tip: If you are starting your business with limited capital a sole proprietorship may be the perfect first step. This will save you money on lawyer fees and filing fees. When your business becomes profitable and you are ready to expand you can always “upgrade” to a business structure that better fits your current needs.

Happy Building and Best Wishes,

Angela Hayes, BS, Master Certified Life Coach

Life Coach Round Rock

I am a life and relationship coach in the Austin area of Texas. I started my own life coaching business, from scratch, and have more than doubled my revenue every year. I love what I do and I really enjoy mentoring others and helping them find a way to do what they love as well.