Corporate Business Structure: What's Right for Your Company?

Sole Proprietorship. This is easy-peasy lemon-squeezy and doesn’t require much to set up, because you are operating your business under your social security number. It means you are the one making the money and responsible for any debts created by the business. You will also have to pay self-employment taxes. The amount of deductions for your business may not be as advantageous as some of the other structures, and there is some liability risk too. 

You might consider this if your dream practice is providing contracted therapy groups to other agencies within the community and you don’t have a business office or overhead. The main downside to a sole proprietorship is that your personal assets are not protected. That means if in the future, someone decides they want to sue you for something they can go after your personal assets (assuming you have any). 

Limited Liability Company or LLC: This structure can be operated by a single member, a partnership, or multiple shareholders and requires some set-up. You will need to obtain a Federal Employer Identification Number (FEIN) which is where all income will be reported to and you will still need to file quarterly self-employment taxes. The benefit of an LLC is that it offers protection from liability on your personal assets (even if you don’t have much yet, ideally you will after you build your practice). This holds as long as it can’t be proven that you were operating your business illegally or were negligent. Another potential benefit is that you are not taxed at the corporate level. **Some states, require you to register as a Professional- Limited Liability Company (P-LLC) or a Professional Corporation. It is imperative that you consult your state’s laws regarding professional regulations to make sure you are choosing the legally appropriate designation. As a general rule, the state will not issue you a refund for filing the wrong type and needing to change it later. 

Partnership: A partnership can be part sole-proprietorship and part LLC. Essentially, this is the structure when two or more people have invested in the business. It can be an equal agreement, or a limited agreement. The latter is designated when one person has more control of the operation of the business, and the other(s) is/are contributors and take profit distributions.   

This is a likely a designation worth considering if you are going to be running and operating a practice, or creating an agency, with a colleague or family member. Do make sure to have a strong contract in place outlining all the expectations for each party, grounds and limits for dissolution, and other agreements.

Corporation: There are multiple types of corporation designations. The main difference between corporations and the other designations is that a corporation is a separate entity from its owner. What does that even mean? Well, it means that the business itself can pursue litigation because it has its own legal rights. It can also own and sell property, such as vehicles or real estate. There are two general types of corporations for tax purposes: S-Corporations and C-Corporations. 

Most of us, small potatoes, might be better served with what is called an S-Corp. The S-Corp is typically owned and operated by one or more people and can offer tax benefits if your business is earning enough money. I highly recommend discussing this with your CPA, because there is additional accounting that is required with an S-Corp. The extra accounting will cost you. So, you have to evaluate if the money you save in taxes is enough to cover the additional expense of the work the CPA will need to do for you (unless you are super numbers savvy and have the know-how and desire to file those quarterly reports yourself). 

Non-Profit Corporation: For those interested in creating a non-profit, this is your option. It is automatic and affords the business tax exemptions. There are very specific criteria that needs to be met in order to make this happen, but it is possible. It also will take more time on the front end to obtain the designation (anywhere from 3-12 months), so plan accordingly. Some of the benefits of creating a non-profit organization is you are able to accept tax-deductible donations from fundraising, receive property tax exemptions, and have greater access to grant monies to fund your services. 

Always consult your state laws regarding any regulations on business structure. Choosing the incorrect designation could be a costly mistake, as generally speaking, the state charges for corrections. It also behooves you to consult a local CPA and lawyer regarding this decision. I did, and continue to have ongoing discussions with my CPA regarding when it becomes advantageous for me to shift my corporate structure. In fact, my CPA helped me navigate the state application to set-up my business because I had no clue what I was doing when I started this journey. There is a ton of great information on these things on the Small Business Administration website, too.