Your blog is starting to take off! Your Etsy shop is beginning to grow! You know you have a business on your hands, not just a hobby, so what's next? Before you register your business, you need to choose a business structure. Believe me, it sounds scarier than it is. Let's find out which structure is right for you. This post may contain affiliate links. For more information see my disclosures.

Types of Business Structure

There are 5 main business structure types. The sole proprietorship, the partnership, LLC, S corporation, or corporation. As a new business owner, the best business structure to choose is either the sole proprietorship or the LLC. These business structures are the simplest to establish and have far fewer requirements and regulations to follow than S corporations or regular corporations. If you own a business with a partner, a partnership or an LLC will be the easiest formation types.

Sole Proprietorship

A sole proprietorship is the easiest type of business to form, and the most common. A sole proprietorship means that it is just you. You are the business, and you run the show. The business is not a separate legal entity. As a sole proprietor, you will file a Schedule C Profit or Loss from Business along with your regular personal 1040 Tax Return (the one you always file). As a sole proprietorship your business income passes through to your personal income tax return, your business is not taxed separately. Schedule C will calculate your business income or loss for the year, and that figure will carry forward to your 1040 Tax Return on line 12. A sole proprietorship is the simplest type of business formation. The drawback of a sole proprietorship is that it offers little in the way of personal asset and legal protection should anything go wrong in your business. The debts of your business belong to you personally, and should a lawsuit arise against your business, the litigant could also go after your personal assets.

LLC

An LLC is a business structure that is created by state statute. An LLC with only one member is called a single member LLC and is treated as “an entity disregarded as separate from its owner for income tax purposes”. That fancy pants language simply means that you are the business, the business is not a separate legal entity. A single member LLC files their taxes in exactly the same way as a sole proprietorship. As a single member LLC, you will file Schedule C along with your 1040 in exactly the same way that a sole proprietorship would. Sole proprietorships and single-member LLCs file taxes in exactly the same way, so there is no tax benefit of one over the other. However, the advantage of forming an LLC is that your personal assets are better protected. Each state differs in how much an LLC shields your personal life from your business. In some states, an LLC offers very little additional protection of your personal assets, in other states the protection is much greater. You may never need the added protection that an LLC provides for your personal assets, but you never know. Why doesn’t everyone automatically set up an LLC? An LLC requires more paperwork to form at the state level and usually costs more in state filing fees. Some states have one-time filing fees to form an LLC, while other states have annual fees that can be steep. Since I am not a lawyer, this information is not legal advice! If you have legal concerns, then contact your own lawyer about your small business.

Partnership

If your business is comprised of more than one member you will need to form a partnership or a multi-member LLC. A general partnership is the multi-person equivalent of a sole proprietorship. They are simple to form and don't have intense requirements like a corporation. Also similar to a sole proprietorship, a partnership is not taxed as a separate entity. The partnership will file an information only return with the IRS, the 1065, but the profit or loss from the partnership will flow through to each partner's personal tax return. The partnership itself does not pay the tax, each partner pays taxes on their portion of the profits along with their personal taxes. A partnership may choose to structure themselves as an LLC that is taxed as a partnership. Deciding to form as an LLC does not change how the partnership and each individual partner are taxed. The 1065 informational return is still filed, and the profits flow through to each individual partner's personal tax return. Similar to a single member LLC, a multi-member LLC can provide additional financial and legal protection to the partners. The level of that protection, as well as the cost to structure the partnership as an LLC, will vary by state. Now that you know what business structure will be best for you, let's register your business!