Which of these 5 business entities is right for you?Jump to content
When you’re growing an idea into a business, one of the first things you’ll need to consider is how to structure it. This process is known as business registration and it makes your business a distinct legal entity. Lots of details about registration are specific to the state you live in, and your business structure. Registration itself is often a pretty straightforward task, and according to the Small Business Administration (SBA), your business is entitled to certain protections, legal and tax benefits once you’re registered.
When should I register my business?
According to the SBA, businesses should be registered as soon as the structure becomes more complex than a single person operation. Plus, to qualify for funding or programs like Target Accelerators, you’ll need to hold a registration.
How do I know which registration is right for my business?
We’ve compiled a helpful guide to registration types, according to the SBA:
- Limited liability company (LLC) is a common registration for small businesses. It separates and protects your personal assets from business losses. You can pass profits and losses through to your personal income without facing corporate taxes, but LLC members must pay self-employment taxes.
A LLC might be right for founders who want to be sure their personal assets are protected and who want to pay lower tax rates than they would with a corporation.
- C corp (generally known as a corporation) is legally separate from its owners, which means the entity itself can be held legally liable. This kind of registration comes with stronger protections but also a higher cost. It also requires more strict record-keeping and operational reporting. Additionally, corporations must pay income tax on their profits.
A corporation can be an option for founders who intend to raise money, plan to go public or eventually be sold.
- S corp is a special type of corporation that avoids potential double taxation common in C corps (on profits and shareholder dividends). However, not all states recognize S corp structures as any different from C corps, so there’s not always a benefit to going through the special process.
An S corp might be a good option for founders who live in a state that recognizes the distinction with tax benefits.
- Benefit corporation, or (B corp), is a for-profit corporation that’s taxed the same as a C corp but is driven by a specific mission. Some states require B corps to submit annual reports to demonstrate their contribution to public good in order to maintain that standing.
In other words, a B corp might be right for those who run a mission-driven company.
- Nonprofit corporation or 501(c)(3) is a company organized to do charity, education, religious, literary or scientific work. Owners need to go through a distinct process of registration and follow special rules about what they do with any profits they earn.
A nonprofit status benefits companies that are run to use their profits in very specific ways.
How do I register my business?
After you settle on which kind of registration is right for your business, you’ll need to go through the filing and documentation process. Here’s an overview of those steps, according to the SBA:
- File for a federal tax ID number
- Decide if you need to trademark your business, brand or product name (if so, you’ll need to file with US Patent and Trademark Office)
- Get a registered agent in the state where you’ll register your business
- File for foreign qualification if your business will be active in more than one state
- File state documents and fees (it typically costs a few hundred dollars to register a business, but actual costs vary by state and business structure)
Check with your state tax board or local tax office to see if reports or other filings are required. Once everything is filed and you have all your documentation in hand, congratulate yourself for completing another huge milestone on your path to business growth and success.
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