A business’s legal structure refers to how the law recognizes its ownership and activities in a given state. And for retail business owners, picking the best entity is a crucial decision.
Your business structure determines how you can scale your business and the liabilities that you can take.
This post discusses the benefits and downsides of each business structure to help you decide which one best suits your business.
1. Sole Proprietorship
A Sole Proprietorship is the most popular business structure for small businesses. It’s the easiest to start and involves the least paperwork.
They also get to enjoy all the profits and suffer all the losses associated with the business alone. A Sole Proprietorship is not a separate legal entity, making the owner personally liable for all business debts.
Sole proprietors also bear the burden of taxation by themselves. They have to declare all their business income in personal tax returns and are subject to self-employment tax.
Sole Proprietorships are less costly to start compared to other business entities, making them great for small-scale retail stores.
2. Limited Liability Corporations
An LLC is a legal business structure that gives you the benefits of both a Sole Proprietorship and a Corporation. While you can be the sole owner of an LLC, it’s also a separate business entity from you.
This way, as an owner, you’re not liable for your business’s debts or any damages and your personal assets are safe.
Also, unlike Corporations, Limited Liability Companies aren’t subject to double taxation and the owners only have to file their personal income tax.
That said, LLC formation is harder and more expensive than Sole Proprietorship formation. More paperwork is involved and you get charged more fees. However, the liability protection makes it a great option for small-mid-scale retail businesses.
Corporations offer the best liability protection to their shareholders, making them great for scaling businesses. They’re also a complex organization to set up and by far the most costly among the lot.
They have more requirements for shareholders, more regulations, and are subject to double taxation.
However, one of the main advantages of a Corporation besides protection from personal liability, is that you can easily seek funding. They make it easy to raise large amounts of capital as you can sell shares to the public and approach investors too. This makes them great for big retail businesses that want to start franchises too.
The infographic below by GovDocFiling summarizes these business entities to help you make a better decision.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.