The entity you choose for your retail business affects how you pay taxes, the protection your assets get from liabilities associated with the business, and the level of growth your business can achieve
We’ll give you a short introduction to three of the main business entities—Sole Proprietorships, Limited Liability Companies (LLCs), and Corporations—and how each structure can affect how you run your business.
Sole Proprietorship
This is where you set up an unincorporated retail business. In Sole Proprietorships, there’s no legal distinction between you and the retail business.
Pros
- Sole Proprietorship formulation is the easiest among all entities.
- All income is passed on to your personal tax return.
- Sole Proprietorships are not subjected to corporate taxes.
Cons
- Your personal assets can be used to offset the liabilities of the business.
- Business growth is limited due to difficulty in raising capital.
Limited Liability Company
This is a business entity that’s formed by filing Articles of Organization with the Secretary of State.
It’s a legal entity that brings together the best features of Corporations and Sole Proprietorships.
Pros
- Easy to form compared to Corporations.
- The profits and losses of the retail business are reported on the individual tax returns of every member of the LLC.
- You can open as many branches as you need under the LLC.
Cons
- A retail business formed as an LLC cannot have shareholders.
- You’re required to pay a self-employment tax and some states also have LLC taxes.
Corporations
A Corporation is formed by filing an Articles of Incorporation. Corporations are legally distinct entities from their owners, like LLCs.
Pros
- Provide flexibility to raise funds by raising funds through shares.
- You can easily expand your retail business to a franchise or operate multiple storefronts by raising funds and with minimal personal liability.
- Among all entities, Corporations provide the highest level of liability protection.
Cons
- They’re the most complicated to form and maintain. They require a lot of record-keeping and reporting.
- Income can be taxed at the corporate level and again charged at the personal level as income from dividends. This causes double taxation.
Establish Your Retail Business Under the Right Entity
Each business entity comes with distinct strengths and weaknesses. Assess your business’s present and future needs, and choose the right entity that’ll support sustainable growth. This infographic by GovDocFiling will provide a clearer picture of what each entity offers and help you make a more informed decision.
