Structuring Your Business
Tips from Senior Vice President, Business Banking Brad Benesh on Setting a Structure for Your Business
By Brad Benesh
Senior Vice President, Business Banking
As a business banker who works with many start-up businesses, it’s no surprise that I’m often asked the best way to structure a business. The answer? It depends … on you, your business, who you’re starting it with, and your goals.
There are four main types of business structures:
- Sole proprietorship. The simplest structure, and thus the easiest to create, a sole proprietorship is popular for solopreneurs, including freelance writers, hair stylists, and computer programmers. You use your social security number as your Federal Taxpayer Identification Number and report your income and expenses as part of your personal tax return. A sole proprietorship is a great way to earn extra money from a side hustle or to test a business concept. But keep in mind that if your company ends up with more expenses than profits, your car, house, or other personal assets could be at risk, even if you operate your business under a different name. Also, if you plan to take out a business loan, your ability to do so will depend on your personal assets and credit history.
- Partnership. If you’re starting your business with one or more friends, family members, or colleagues, you may want to consider a partnership. Like a sole proprietorship, a partnership is easy to form and operate, and your income and expenses are reported on your personal tax return. There are two types of partnerships: general and limited. Ask your accountant or tax advisor to explain the pros and cons of each.
- Corporation. Unlike a sole proprietorship or partnership, a corporation protects your personal assets from the company’s liabilities. That’s because a corporation is a separate entity with its own assets and liabilities. As such, it requires a separate bank account and Federal Taxpayer Identification Number. There are two main types of corporations, S Corps and C Corps. A third type is gaining popularity in some states, including Minnesota: B Corps. These for-profit businesses care about both making money and making a difference and typically address important societal issues such as homelessness or deforestation.
- Limited liability company (LLC). Today’s most popular business structure, an LLC is a hybrid structure that protects your personal assets from your company’s liabilities, while offering some of the tax advantages of a sole proprietorship or partnership.
There is no one-size-fits-all solution, so weigh your options carefully and seek the advice of an accountant, attorney, or tax advisor.
Also take advantage of these free resources:
- Starting a business. Brought to you by the Minnesota Department of Employment and Economic Development, this comprehensive site will help you tackle your questions in the order you’re most likely to ask them.
- How to start a business in Minnesota. From tips on how to choose the right business structure to registering your business, this Minnesota Secretary of State webpage is jampacked with valuable resources, as well as links to required filings.
As an experienced business banker, I've helped many new business owners set up their companies for success. If I can be of service to your business, feel free to contact me!
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