What Business Structure Is Suitable For A Consulting Business?
When you decided that you wanted to start a consulting business, the business structure of your business probably wasn’t the first thing that came to mind. However, if you want to maximize your potential for making profits while reducing the possibilities of encountering risks, then choosing the right business structure becomes important.
Why Business Structures Are Important
There are three important ways in which the business structure you choose can affect your consulting business. These include:
- Forming The Business: For some legal entities, you need to complete a lot of paperwork before you can start your business. For other legal entities, so much paperwork is not required.
- Tax Issues: Different business structures are taxed in different ways. Depending on the legal structure you choose, you may be able to make greater profits by paying less when it comes to taxes.
- Liability: Under some business structures, you become liable personally for any failures experienced by your business. This means that if there are any damages, you would need to pay for it yourself. You could lose your assets, like your home or your car as well. There are other legal structures where you, as well as your assets, can enjoy a greater degree of protection.
What Are The Business Structures Available To You?
There are four business structures that you can choose from, as a consulting business owner. These include:
1. Sole Proprietorship
Under this kind of business structure, the business is unincorporated. This means that it isn’t a corporation that’s legal. A sole proprietor is someone who is usually an independent contractor, a freelancer, or a consultant. If you choose this business structure, then you won’t have to do a lot of the paperwork. You also don’t have to register your business with your state. When you start a business activity, this means that you’re open to business.
You might, although, need a DBA or ‘doing business’ certification. You could also need to get permits and licenses to operate in your city. Note also that the assets and liabilities of the business, under this business structure, are not separate from your personal assets. It isn’t the business that will need to file taxes. It’s through the tax return that you file personally that you’ll need to report any profits or losses.
In case you find yourself in a lawsuit with regard to your work, then under this business structure, your personal assets could be in danger.
2. LLC
An LLC is also a business that’s unincorporated involving multiple members. Of these members, at least one if not more is considered the owner of the business. To form this kind of business structure, you need to do more paperwork. You’ll need to first file the papers of formation, with the state. Then, you’ll need to gather the operating agreement for your LLC. This agreement states what is expected of the members of the LLC.
Any profits or losses that your business experiences will be reported through your personal tax returns. Many business owners prefer this business structure since they can enjoy a greater degree of protection for their assets. Under an LLC, business owners are protected when it comes to personal liability. This applies to failings that don’t include being wilfully negligent, partaking in illegal activities, or harming the other members of the LLC.
To form an LLC, you need multiple people. An LLC formed by one person isn’t considered a corporation. It’s treated as an entity that’s disregarded instead. As a result, your assets as well as your liabilities of the business, won’t be viewed as different from the assets and liabilities that you personally own.
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3. C Corporation
A C corporation is essentially a large business that’s been incorporated and has various shareholders as well as employees. Usually, these business entities are seen as a for-profit. This means that the number of years such an entity can experience losses is unlimited. During tax time, this can be a benefit. However, a C corporation needs to distribute stock shares in order to appoint the owners. The owners are also the shareholders.
Shareholders of a C corporation don’t have to deal with personal liability, where business debts are involved. This is true even in case one particular shareholder has a greater stake in the business.
4. S Corporation
Under an S corporation, you can avoid double taxation, which is something that C corporations need to deal with. The stock shares, under this business structure, will need to be distributed in order for the owners to be appointed. The owners of the S corporation are thus the shareholders. However, there can be a maximum of a hundred shareholders in an S corporation.
Under this business structure, the personal assets of the owners are protected, especially against liabilities incurred by the business.
Conclusion
There are different pros and cons when it comes to choosing different business structures. Depending on how you want to run your business, and who you want to run your business with, you can choose one of the aforementioned business structures. This guide covers the four business structures that consulting business owners should know about.
