How to Choose a Good Business Structure

There’s lots of choice out there for business structures. Should you start with a Schedule C, or jump into incorporation? What’s better, a C Corporation, or an LLC? And why do so many people recommend LLCs? Sometimes, there can be too much choice.

When someone comes to me and asks about the best business structure, I’ve got a few key questions I ask:

1. What is the business going to do?
2. Where are the business operations going to take place?
3. Who are the owners, and where do they live?

The first question helps to determine the appropriate tax classification. Each structure is taxed differently, and what works in one case doesn’t work in all cases. For example, a service business stuck in a Schedule C or LLC with default taxation will result in you paying too much in payroll taxes.

The second question helps me to figure out what state or states we should use. That can impact the entity choice too. Sometimes there is a big difference in state filing fees, depending on the business type.

The third question lets me make sure there are no “gotchas” out there, especially where one or more of the owners is outside of the US. It’s a whole new ball game where foreign owners are involved.

And those are just my preliminary questions. Depending on the answers, we drill down from there to create the right business structure for each client.

You’ll find lots more information on business structures, and how to choose between them in Smart Business, Stupid Business. With rapidly changing tax laws, this is going to be an area you’ll need to keep an eye on.