The right business entity creates a strong foundation through which you can run and grow your business.
There are three main business entities you can form—Sole Proprietorships, Limited Liability Companies (LLCs), and Corporations.
Each entity has different implications regarding liability protection, taxation, and other critical aspects that’ll stick with your retail business for years.
Let’s answer four questions that’ll help you choose the right entity.
What is the Easiest Business Entity to Form?
Sole Proprietorships are the easiest business entities to form. You can start them in your name.
The cost of forming a Corporation is higher than every other business structure. It’s also challenging. Running a Corporation comes with rigid requirements like mandatory AGMs, reports, and record-keeping.
Limited Liability Companies are easier to form than Corporations but slightly more complicated than Sole Proprietorships.
Which Business Entity is Best for Taxation?
When it comes to taxation, Sole Proprietorships and Limited Liability Companies are excellent choices. You’ll not have to pay corporate taxes. This is because the income is reported through the individual tax returns of the Sole Proprietor or LLC members.
You are, however, still required to pay self-employment taxes.
Corporations come with double taxation. The income of the retail business can be taxed at the company level and again at the individual level through dividends paid to shareholders.
However, you can form an S-Corporation to avoid this double taxation. In S-Corporations, the Corporation doesn’t pay taxes. Profits and losses pass through to the shareholders.
What Entity Has the Most Liability Protection?
Corporations are separate legal entities that have the same rights and responsibilities as individuals. They offer the best liability protection. This makes them great for large retail businesses.
Limited Liability Companies also provide liability protection to a great extent.
Sole Proprietorships don’t provide any liability protection. There’s no legal distinction between a Sole Proprietorship and its owner.
Which Entity Offers the Best Scalability?
A Corporation will provide your retail business with the best scalability. You can:
- Raise additional funds by selling shares. You cannot issue shares with an LLC or Sole Proprietorship.
- Expand your retail business into a franchise or open multiple stores easily by raising funds.
It’s not very easy to raise funds for a Sole Proprietorship firm, on the other hand.
Ready to Start Your Retail Business?
Choosing the right entity for your business is easy if you know your preferences in taxation, liability protection, the complexity of the business structure, and its ability to support growth.
This infographic from GovDocFiling offers more information on these three business entities.
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.