Shawn Khorrami is an experienced lawyer, but more importantly a career-entrepreneur. As such, he is often providing guidance on a client’s business structure. In the United States, businesses must be taxed on their profits, and the structure that the business selects has a major impact on how and how much the owner pays in taxes.

But there are other considerations as well. What is the primary goal of the company? Will there be partners and investors? How will the owner(s) be paid? These are just a few additional questions that need to be addressed when choosing the best fit for your startup. As an entrepreneur with experience in starting several ventures, Khorrami notes that before you choose a business structure, you must first understand the differences.

Sole Proprietorship (SP)

For freelancers and side businesses, sole proprietorships keep things extra simple. Essentially, when the “side gig” makes money, then the business owner makes money. They are taxed as individuals (like independent contractors).

If one’s business is more than a side gig, Shawn Khorrami strongly recommends one of the other business entity setups listed below. Disgruntled customers could sue the individual business owner if their business is only a sole proprietorship. In other structure setups, the business owner is protected personally in the event of a legal dispute.

Pros

• For small scale side businesses, taxes are usually much less
• Easy and cheapest to set up (default business setup)
• Easiest to maintain bookkeeping for tax purposes

Cons

• No liability protection (the business’s and owner’s personal assets are one and the same)
• No allowance for business partners

Limited Liability Corporation (LLC)

Limited Liability Corporations, or LLCs, are a happy medium between sole proprietorship and full corporation. It offers business liability (so that the business owner’s personal assets and credit are protected), and one can choose whether to file as an individual or a corporation at the end of the year.

Pros

• Liability protection
• Ability to file as individual or corporation
• Allows for business partners
• Ability to setup payroll and basic benefits

Cons

• Not ideal for investors
• No ability to sell shares
• No ability to do business out of the country

Corporation

Any medium to large scale business with employees is usually going to be set up as a corporation. There are several different ways to file, although Shawn Khorrami notes that in America, the two most common are S Corp and C Corp. C Corporations are the standard corporation under IRS regulations while S corporations have a special tax status with the IRS but have a number of restrictions placed on them. Corporations are vital for businesses that have shareholders or do business overseas.

Pros

• Liability protection
• Best for payroll purposes
• Best for adding investors
• Permits the sale of shares
• Allows the company to do business overseas
• More benefits to offer employees

Cons

• Most complex and inflexible business structure
• Most expensive entity setup
• Maintaining company financials is more difficult
• All employees (including owners) are taxed on their income, and the business profits are also taxed

In Conclusion

As an entrepreneurial expert himself, Shawn Khorrami advises all business owners to consult professionals when deciding on a business structure that is best for them. This includes working with a small business attorney, as well as discussing all financial projections with a certified public accountant. Wise business owners consult these professionals on a regular basis to remain compliant, as well as to save money where possible.