How to Choose Which Business Structure is Best for Your Business

Dive into the labyrinth of business structures with our experts on today's episode! Whether you're launching a startup or scaling your enterprise, choosing the right business structure is crucial. From sole proprietorships to LLCs, C Corps to S Corps, we break down the pros, cons, and tax implications.

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Transcript

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Now, today's show is a great one for the business owners. We'll be discussing the different business structures and how to choose the best one for your needs as let's dive into today's topic right now. So what are the basics when somebody is starting a business, Leisl, what are the main business structures they should consider? Well, there's several options here, Wayne, and there's pros and cons to each of them, and I'll try to break it down as best I can. And of course, there's I'm sure there's some small business owners listening as well. But the five main structures that we focus on are sole proprietorship, partnerships, limited liability company, a C Corp and an S Corp. And so we'll talk a bit about what the differences are with each of these today. All right, give me a brief overview of each one, starting with sole proprietorship. Yes. And this is the most simple and straightforward structure. It's owned by a single person. So sole proprietorship. And it's easy to establish. However with a sole proprietorship, it's you don't have that liability, that limited liability coverage that you get from some of the other structures. And so what that means is that if you're operating under your individual name as a business owner and something goes wrong or a customer sues you, all of the assets that you have could be subject to that lawsuit. So for example, both business and personal assets. So it doesn't give you any kind of liability protection there. What about partnerships? How do they differ from sole proprietorships? They're very similar. It's just that now it's between two people. And so in that partnership, any profits or losses are shared between the two owners, and it's reported on their income tax return. Now, again, sort of similar to the sole proprietorship in that the risk would be now shared between those two partners. So if they're just, they're truly in a partnership, the business is in their individual name as joint owners, that would mean that also their personal assets are at risk. But another benefit to this is that you have a partner you can lean on and make business decisions together, and it could limit that individual control. So you have some balancing. Leisl, specifically limited liability companies. What are the advantages of that structure? Yeah, so good question, Wayne. And that something that a lot of small business owners tend to stick with an LLC, it's a little more simple. It does reduce the business owner's liability, so it provides some protection against personal assets. And so I had talked about the sole proprietorship and the partnership, and those two are the ones that do not provide protection on personal assets. And so a limited liability company, what happens is you list, all of your equipment, if you're using a truck or some other kind of vehicles, you would list those under the name of the company. And then you do all of your business and your invoicing and contracting through the name of the business. And that provides you that separation from your personal assets. And then in addition, so LLCs, they are taxed a bit differently. But owners must pay that self employment tax and social security and Medicare. So that's something that LLCs deal with. And they can, but all of the income is passed through directly to the owner as well. And we have a lot of businesses around here that are LLCs. And from your position, would you say it's wise for a small business to be an LLC, or these other options we're talking about would be on the table as well? Well, right. So LLCs, like I said, they're pretty simple and straightforward, especially for small business owners. Another option for a small business owner would be to file as an S Corp. But we also are talking about C Corps as well today. And a C Corp, while that offers the highest level of personal liability protection, those are for your bigger companies. So think of you know, some companies that have more than, we say, 100 shareholders or owners of a company. And the only thing with a C Corp is that it could be taxed or could be taxed at that double taxation, which is probably. Maybe a term that you've heard when it relates to C Corp. So that's something that to take into consideration if you're going that route. Well, double taxation does sound like a significant concern. Is there an alternative that provides similar benefits without the double taxation issue? Yeah, and that's where S corps come in. So what they, that's for companies that have 100 or less shareholders and they provide that same personal liability protection as C Corps do, but they avoid the double taxation and that's because the money in an S Corp passes through to the owners. Whereas in a C Corp that money gets taxed. Business profits get taxed at 21%. So sort of a different rate for corporations. And then corporations typically pay dividends to share owners and that's when those dividends get taxed again as well. So with an S Corp, everything flows through to the owners and they get taxed at their personal tax rate. With all these options and factors to consider, how can somebody determine which of these structures is best for their business? Yeah, and that really depends on an individual's specific needs and goals. So a sole proprietorship, that might be ideal for a small business owner who can afford the financial risks and wants to set up and make it easy and have direct control. An LLC, on the other hand, would be great for a business looking for asset protection without the same taxes as a corporation. So for example, the C Corp are excellent for longer term growth and sustainability and protecting that owner from personal liabilities. So there's a lot of options. S Corps in addition can provide similar benefits without the double taxation issue that we just talked about. And so it really comes down to what does the business owner, how do they want to be protected? And then the second piece of that is taxation and managing that. Leisl, I heard you use the phrase "setup". What about the process of setting up these different structures? Would that be complicated? Yes, it is. And it is a sole proprietorship and a partnership, those are relatively easy and straightforward, again, because there's not much in the way of the liability protection. So you're not creating documents to establish the liability protection. In the example of an LLC. So with an LLC or a C Corp or an S Corp, you really need an attorney to help draft legal documents that would basically create that separate entity. And then you'd have to file with the state that you do business in to make sure that they know that it's a legal entity and it's created and you're doing business under that name. So there's more paperwork involved but it does give that added protection to have an LLC S Corp or a C Corp. And speaking of taxes, tax implications are a major consideration for any business. Can you elaborate on how those structures are based? Sure. So the sole proprietorship and partnership. Those tax business income is reported on the owner's personal income tax return. So depending on how big your business is, you could be in a pretty low tax bracket. So that, that might make sense to have that flow through to you personally. LLCs, again, the income flows through, but you're paying self employment taxes. And you are paying those, those, you know, when there's profits, you're paying taxes on that also at your income tax rate. So again, that's more of a flow through structure with the LLC, but it does give you that liability protection. And then C Corps, like I said, the double taxation. So any profits are taxed at 21%, and then when they pay out dividends to shareholders, again, those dividends are taxed with the shareholders. So that's something that, to, to be aware of. And then S Corps, they can avoid this double taxation, again, because the money can get or business profits distributed directly to the owner. So they sort of avoid the double taxation because they're not paying dividends out to shareholders. Well, it's clear there's no one size fits all solution when it comes to choosing a business structure. Leisl, what advice would you give to somebody trying to make that decision? Our advice is always talk with a financial advisor and a professional tax person that can help you make these decisions. I also mentioned having an attorney that could help draft documents for you to create these legal entities to separate business from personal. And so at Whz, we are the quarterback of that, especially when we work business owners. So making sure that they have the right accountant, that's helping them, maybe with bookkeeping services, and then an attorney that can help them draft legal documents and things, and be that attorney that they need to lead on if there's any legal issues that come up. And so we, again, take a holistic approach to all of this. And we consider factors like personal asset protection. Do you need that personal asset protection? And if you're going into and having a smaller business, you probably may want to consider it. An LLC is not that difficult to set up. And that's the simplest of the C Corp, S Corp and LLC liability protection businesses to consider. So all of these things are factors that we consider as we create a customized plan that would align the business owner's goals to their own personal goals as well. That's excellent advice, Liesl. It's crucial to have expert guidance when making such an important decision for your business. Absolutely, Wayne. And whether you're just starting out or you're looking to optimize your existing business structure, seeking professional advice can really help provide that clarity and confidence in your decision making process. And so at our firm, again, take a holistic approach. We have deep experience and knowledge to help our clients to navigate the complexities of these business structures. And it's just give that hyper personalized financial plan that they can follow and be successful with. And one of the outstanding advisors besides yourself at Weiss, Hale & Zahansky is our pal Jim Zahansky, principal managing partner and chief goal strategist at Weiss, Hale & Zahansky Strategic Wealth Advisors. And just this week, he was awarded the prestigious gold key award by the Northeastern Connecticut Chamber of Commerce. The Gold Key award recognizes Zahansky's exceptional business leadership and community involvement in northeast Connecticut. Liesl, I know that he's like a mentor for you, for that matter, he's a mentor for me, too. But just say a couple of words about what Jim Zahansky means to you and your firm. Yeah, well, thanks, Wayne, for recognizing Jim. And, yeah, we're all very proud of his accomplishments. And you probably saw in the release as well all of the things that he's involved in, in the community and how he runs the business at WHZ as well with his partner, Laurence Hale. And really, we all admire both Jim and Laurence for their leadership and how they've led the company. And they really are the leaders that you look to and can help move business forward. But they do it in such a way that they have compassion for the company, for all of the employees, and they really push us to grow as well. And so it's really great. And Jim, we're, again, really proud of, of his accomplishments. He deserves this, and we see that we get to experience it every day at our company. So it's really neat. Thank you so much for sharing our expertise today, Leisl, and for our listeners. If you're seeking a knowledgeable partner to help craft a hyper personalized financial plan to provide absolute confidence, unwavering partnership for life, get in touch with Liesl and the rest of the team at Weiss, Hale & Zahansky Strategic Wealth Advisors. You can request a complimentary consultation on their website whzwealth.com. or give them a call 860-928-2341 Leisl, thank you for joining me again today and sharing your expertise. For more information regarding wealth management and customized financial planning with Weiss Hale and Zahansky Strategic Wealth Advisors, please visit whzwealth.com. Weiss Hale & Zahansky Strategic Wealth Advisors offers securities and advisory services through Commonwealth Financial network member FINRA, SIPC, a registered investment advisor, fixed insurance products and services offered through CES Insurance agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut 06259 and 392-A Merrow Road, Tolland, Connecticut 06084 They can be reached at 860-928-2341 Weiss, Hale & Zahansky Strategic wealth advisors do not provide legal or tax advice. The tenured financial services team strives to support clients in achieving their financial life goals while providing absolute confidence and unwavering partnership for life.