The decision of what type of business structure are you wanting to create is one of the first decision you must make after you decide to build a business. There are a few possibilities you can be a sole practitioner, general partnership, or group practice, i.e., a corporation. Deciding on what you truly want will help you in the decision of the type of structure you want your business to take.
The sole proprietor is the most common form of business structure, and this type of structure allows you to be the only person in your business, you do not need a dba, and you have pass-through income. The sole proprietor is 100% responsible for the Liability for the business. In this structure, you are it you make all decisions; you do all the work and enjoy all the gains.
The next question you need to answer is, do you want a group practice? A group practice will take a different type of business structure. A group practice can be set up as a partnership with all partners buying in a certain at a certain percentage, or you can have one person create the practice and hire in staff to do the work.
The next type of structure is general partnership is structure is when two or more people take responsibility for the business, and they divide up the chores of setting up a business. This structure will require a contract, and it is best to list all the duties that are needed and then divide them up among the partners. This too is a simple tax structure, and the income will pass through to your personal income tax. In this structure, the partners are responsible and liable for the company and the company debts.
In some states, you can create this third type of structure an LLC or Limited Liability Company or a PLLC Professional Limited pass-through Company. In this structure, you can be a sole person, or you could have business partners. This is a hybrid type of corporate structure an LLC/PLLC blends the features of a corporation with that of a partnership or sole proprietor. For simplicity sake, if you live in California, you are not able to do this type of structure for your business. An LLC is a business structure that provides some liability protection for the owners as the owners only have risk up to what they have individually invested in the company and are not personally responsible for the company debt. A PLLC is designed for licensed professions with the same liability protection and pass-through taxation. In many states, if you are a licensed professional, you must create a PLLC and not an LLC.
The last structure for a business is a corporation. These can be either a C-Corp or an S-Corp. The difference between these two entities is based on your tax status; thus, it’s best to speak to your CPA or account to help you determine which structure is right for you and your business. A corporation requires you to create a board of directors, and you must have an annual meeting with your board. Therefore, you must have other people joining in on your business endeavors.
Do not worry about picking the wrong structure; you can always change it later if you wish. For example, you are a sole practice, and then you want to create a group practice with employees or independent contractors (IC). You can always switch business structures if you determine later you need a different one. In my business, we started as general partners for our business structure, where we each bought into the company. Later, when we’re a stronger company with more revenue, we switched to an S-Corp.
Once you have decided which structure is best for your business, it’s now time to request your Employer Tax Identification (EIN) from the Internal Revenue Services (IRS) and make your business official. You can even do this online. It is a great feeling to have that paper from the IRS saying that now you are a business; enjoy that feeling it’s a great one.
Check out also my video on Business Structure
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