Are you an aspiring entrepreneur with a brilliant business idea? Are you eager to transform that idea into a thriving retail business? If so, you’ve probably already begun your preparations for starting a retail business.
Launching your business begins with the crucial decision of choosing the kind of business structure you want to adopt.
Why?
The business structure you choose will influence the kind of funding you can get, the operations, and the taxes you will pay.
The top 3 business structures in the US that you can choose from are: Sole Proprietorship, Limited Liability Company (LLC), and Corporation.
Allow me to give you a brief overview of these legal entities, as well as their pros and cons, to help you choose the right one for your retail business.
Let’s get going!
1. Sole Proprietorship
If you are starting a retail business on a small scale, a sole proprietorship is the most suitable option for you.
What makes me so sure?
Because a sole proprietorship is the easiest business entity to set up and has minimal paperwork. The owner need not register his or her business as a legal entity with the state and is not obligated to submit annual reports and filings.
The owner has the flexibility and complete authority to make decisions, run the business at their own pace, and hire employees.
One of the biggest advantages of sole props is that there are no corporate taxes. The owner is the sole beneficiary of the profit that the business makes and they simply pay self-employment tax.
As the owner has unlimited liabilities, their personal assets are at risk. They may not be able to raise corporate funds or even take on a business debt. If you are planning to open multiple stores, sole props may not be the ideal legal entity for you.
2. Limited Liability Company (LLC)
LLC or Limited Liability Company is the most preferred business structure for entrepreneurs. Similar to a sole proprietorship, LLC is flexible and has minimum paperwork. But the LLC owner or owners have limited liabilities and thus their personal assets are protected.
This business structure is most suitable for startups and small businesses who want to enjoy the flexibility and tax benefits of sole props and also want their personal assets to be protected.
LLCs are not subjected to double taxation, nor do they pay corporate taxes. It faces limited compliance requirements imposed by the state and is more credible compared to a partnership or sole proprietorship.
However, not all states in the US have the provision to start an LLC. You may find it harder to transfer ownership, and the costs of running an LLC are higher than for sole proprietorship as one has to maintain files and submit accounts to the IT department.
3. Corporation
The state recognizes a corporation as a legal entity separate from its owners. It is the most complex business structure to establish, as the formation process is a long and complicated one.
In a corporation, the owners are shareholders who are not responsible for making decisions, and they do not participate in any of the day-to-day operations. That’s taken care of by the board of directors and the employees. A corporation is a great choice if you are expanding your business or creating franchises.
There are two types of corporations, namely, C Corps (double-taxed) and S Corps (not double-taxed). A corporation can secure outside funding and can easily go public.
It is not the ideal choice if you are starting your retail business on a small scale as the running cost and taxes are too high.
You can choose any of these 3 business structures while starting a retail business based on your business plan. When making the decision, you should seriously consider their advantages and disadvantages.
Check out this infographic by GovDocFiling to get a crisp overview of the pros and cons of each business entity. Once you have chosen the right legal entity, you can begin to work on other elements of the business plan and establish your retail business.
