Things to Consider when Deciding on Your Type of Business
After you launch your small business and you get a little breathing room, youʻll often run into the question of how you should set up your business legally. Two common options are:
- Sole proprietorship – the simplest option
- Incorporation (like forming an LLC or a corporation) – a more formal setup
Both options have their pros and cons. This article will help you understand the differences so you can choose what’s right for you.
What Is a Sole Proprietorship?
A sole proprietorship is the easiest way to start a business when youʻre the only owner. You don’t need to file any special forms (unless you want to use a name other than your own for the business), and you report all your income and expenses on your personal tax return.
Pros of Sole Proprietorship:
- Easy to Start: Just start working—no paperwork needed in most cases.
- You’re the Boss: You make all the decisions yourself.
- Low Cost: No expensive legal fees or registration costs.
- Simple Taxes: You file your business income with your personal taxes.
Cons of Sole Proprietorship:
- You’re Personally Responsible: If your business owes money or gets sued, you’re responsible. That means your personal assets (like your car or savings) could be at risk.
- Harder to Get Loans or Investors: Banks and investors usually prefer working with incorporated businesses.
- You Can’t Sell or Transfer Easily: It’s harder to pass your business on or sell it.
- You Pay Self-Employment Taxes: This can mean paying more in taxes compared to other business types.
What Does It Mean to Incorporate?
When you incorporate your business, it becomes a separate legal entity. You can do this by forming an LLC (Limited Liability Company) or a corporation (S-corp or C-corp). These options offer more protection and flexibility, but they come with more rules.
Pros of Incorporation:
- Personal Protection: Your personal assets are usually safe if the business is sued or goes into debt.
- More Tax Options: Depending on how you set it up, you might save on taxes or spread income in a smart way.
- Better for Growth: Investors and banks may take your business more seriously.
- Business Lives On: You can sell the business or pass it on more easily.
Cons of Incorporation:
- Costs More: You’ll have to pay to set up the business and keep it legal each year. Some states even require a minimum annual tax.
- More Paperwork: Youʻll likely need to file extra tax forms or reports each year.
- Stricter Rules: You have to follow more laws and regulations, especially for corporations.
So, Which Option Is Better for You?
A sole proprietorship might be right if:
- You’re just starting out or testing a business idea.
- You don’t need to raise money or hire employees right away.
- Your business doesn’t involve much risk (for example, graphic designer or photographer).
- You want to keep things simple and low-cost.
Incorporating might be better if:
- You want to protect your personal assets.
- You plan to grow, hire others, or raise money from investors.
- Your business could be sued or owes money (for example, offering services to clients or selling physical products).
- You want your business to continue after you step away or retire.
Helpful SBA Resources
Here are some useful links from the U.S. Small Business Administration (SBA) to help you learn more:
- 👉 Choosing the Right Business Structure
- 👉 Sole Proprietorship Guide
- 👉 LLC (Limited Liability Company) Overview
- 👉 Corporation Basics
- 👉 Loans & Financial Help for Small Businesses
You Can Change Your Mind
There’s no “one size fits all” answer. Many small business owners start as sole proprietors because it’s quick and easy. As their business grows, they switch to an LLC or corporation to get more protection and benefits.
Take some time to think about:
- How much risk your business involves
- Your goals for growth
- Whether you need legal protection
- Your comfort level with paperwork and costs
If you’re unsure, think about talking with an accountant or a small business advisor. The SBA also offers free help through local programs like SCORE or Small Business Development Centers.
💬 How did you choose your business type? Let us know in the comments!
