Deciding which business structure to file under is one of the most crucial choices an entrepreneur will make.
Get it wrong, and you could be paying thousands in extra taxes or risk personal assets in lawsuits. Get it right, and your business has the proper legal foundation on day one.
Here’s the deal…
Did you know that each business structure has different filing requirements, tax implications, and liability protections?
Knowing the differences between a sole proprietorship vs LLC vs Corporation will save you time, money, and possibly your business.
Let’s cover:
- What Are The Main Business Structures?
- Filing Requirements For Each Structure
- Mail and Package Forwarding’s Role In Business Compliance
- Which Business Structure Is Right For You?
What Are The Main Business Structures?
When filing your business you’ll see four main options. While they each look very similar on paper, the legal differences are vast.
Sole Proprietorship
This is the simplest form of business structure. Simply put; there is no distinction between the owner and the business for legal or taxation purposes.
All business income is filed on the owner’s personal tax return each year. While this makes for easy filing, it also leaves the owner’s personal assets vulnerable in lawsuits.
LLC (Limited Liability Company)
The structure most distinctly separate from a sole proprietorship is an LLC. The LLC protects the owner’s personal assets from being tied to the business.
LLCs account for nearly 43% of small businesses in the United States, making them by far the most popular filing structure.
Corporation (or C-Corp)
A corporation is a separate legal entity. Meaning, it provides the highest level of asset protection for owners and shareholders.
Be careful, though. Corporations have strict filing requirements, and profits are taxed twice. Once at the corporate level and again as personal income.
S-Corporation
While technically not a business structure, an S-Corp is a tax designation allowed by the IRS. An LLC or corporation can file for S-Corp tax treatment.
Each structure requires a physical business address for your state filings. Many remote workers, entrepreneurs, and home businesses use mail and package forwarding services to keep their address private (like virtual business addresses in San Francisco).
Filing Requirements For Each Structure
And now for the fun part…
Each business structure has wildly different filing requirements. Miss a deadline or filing and your business could be fined, dinged for late fees, or worse, face dissolution.
Sole Proprietorship Filing
Sole proprietorships are known for their lack of paperwork. Depending on the state your business is located, you may not even be required to register at all.
As long as you operate under your given name, you can skip straight to filing taxes. But if you plan on filing under a “Doing Business As”, there are a few other things you’ll need to do:
- DBA – “Doing Business As” Filing: A DBA is required if you plan on operating under a name that is different from your own. Go to your city or county clerk’s office to file.
- Schedule C Tax Form: File with your personal taxes each year to report business income.
- Self Employment Taxes: Quarterly tax payments are due in estimated amounts.
That’s it! Now you’re done with filings until the following tax season. No annual updates, articles of organisation, or strange tax forms.
Well… except for the unlimited liability (business lawsuits affect your personal assets).
LLC Filing
Things start to get a little more complex when it comes to LLC filings. Like corporations, LLC owners aren’t personally responsible for lawsuits against the business.
The good news is that formation documents aren’t overly difficult to file. Once completed, there are just a couple more requirements to maintain good standing with the state.
- Articles of Organisation: This form is filed with your local state to officially register your LLC.
- Registered Agent: LLCs are required to have a physical address and individual to receive legal documents on behalf of the business. You can even use a mail forwarding service to satisfy this requirement.
- Annual Reports: In most states LLCs must file yearly between $50-$400 depending on the state.
- Operating Agreement: Technically not required but highly recommended. An operating agreement is the LLC equivalent to corporate bylaws.
Want to know what most new business owners don’t know?
Forming any business structure in every state requires a physical street address. When filing your formation documents, you cannot use a P.O Box. Fortunately mail forwarding comes into play.
By utilizing mail and package forwarding services, remote businesses and digital nomads have access to real business addresses all over the country (even Vancouver!). Preventing the need to pay for commercial real estate.
Corporation Filing
Runners up for most intensive filings belong to corporations. Not only do corporations require annual filings, but they must adhere to strict internal protocols.
Since corporations are actual taxable entities, they file a separate tax return from owners.
- Articles of Incorporation: Filed with the Secretary of State.
- Bylaws: The bylaws of a corporation are rules put in place by the founders. They dictate how certain aspects of the business operate.
- Annual Reports / Franchise Taxes: Annual filings to maintain good standing with your state. Costing around $50-$400 per year.
- Corporate Tax Return: Filed using IRS Form 1120.
Everything about incorporating weighs heavily on formalities. Which also comes with added expenses like outside accountants and lawyers.
Mail and Package Forwarding’s Role In Business Compliance
Okay this may seem out of nowhere but stay with it…
No matter what business structure you decide on, every company needs to have a way to receive mail.
Whether it’s from your state agency, IRS, banking institution, or local licensing. Every piece of mail that comes your way needs to be opened on time.
In fact, last year alone there were over 5.5 million businesses applied to start!
A big reason remote workers and fully mobile businesses utilize mail forwarding services. Here’s how mail forwarding can help your business:
- Receive a physical address for state filings, IRS, and business registration.
- Forward important mail like tax documents and legal notices.
- Keep your home address off public records for increased privacy.
- Establish a business presence in any city or state.
If you operate in more than one state, this will be extremely beneficial. Mailing documents to the wrong state is no longer a thing.
Which Business Structure Is Right For You?
With so many options, which structure should you file as?
Well, that depends on your business.
Liability: Do you feel your business has any risk behind it? If so, an LLC or Corp will give you the liability protection a sole-prop allows.
Taxes: Sole proprietors and LLCs are taxed once on profits. Corporations suffer from double taxation unless they also file as an S-Corp.
Intent to Grow: If you have every intention to grow your company by investing or selling stock. Corporations make this easy. LLCs and Sole Proprietorships do not.
Tolerance for filings: Some owners desire minimal paper trails. Others don’t mind the extra steps for more protection.
Pick the business structure that best suits your needs. And remember, every single filing will (and should) go through a mail service of some sort.
Final Thoughts
It’s worth spending one final minute on why understanding business structure differences is important.
Here’s a quick rundown:
- The difference in business structures defines your:
- Tax Obligations
- Legal Liability
- Filing Requirements
- Annual Fees
Believe it or not, there were over 5 million small businesses filed in 2023. Running your business how you want means knowing the difference between a LLC and a sole proprietorship.
Each new entrepreneur will have to decide. Don’t leave your business foundation up to chance.