Choosing the best entity type when starting a retail business is the best decision you will make.
The entity you choose will have a big impact on the legal and financial decisions you will make for your business.
In fact, the business entity type you choose will determine whether you will get startup funding or not. Remember that 38% of startups fail because of the inability to raise capital.
So what’s the right entity type for starting a real estate business?
When starting a retail business, you will need to choose between the following business structures:
1. Liability Company
A Limited Liability Company offers liability protection to members. This means that members aren’t held responsible in case the company incurs losses or is in debt. Thus personal assets are protected.
Besides, members are exempted from the legal actions faced by the company.
This type of business entity offers great flexibility in taxation and simplicity of operation.
What’s more, there are no ownership restrictions with LLCs thus you can incorporate a company with as many members as you want.
Plus, due to the independence level of the company to its members, it can be sold or passed on.
Forming an LLC is more expensive than a Partnership or Sole Proprietorship though.
There is also a lack of privacy since company accounts are made public and members don’t have much control when compared to a Sole Proprietorship.
2. Sole Proprietorship
The Sole Proprietorship is the simplest, cheapest, and most interesting structure for starting a retail business.
There is no business registration required with the state when starting a retail business as a sole proprietor. However, you might be required to apply for a local business permit.
A good example of a Sole Proprietorship is when you start a freelance business. Retail store owners and consultants can also start as sole proprietorships.
The beauty of this type of business structure is that it’s easy to start since there is no registration required by the state.
The drawback with a Sole Proprietorship business is that as the owner, you’re 100% responsible for debts, losses, liabilities, and legal actions.
It’s also not easy to get a business loan and raise money since there is no distinction between you and the business.
A Corporation is a type of business formed by individuals, stockholders, or shareholders who appoint a board of directors to run and manage the corporation’s activities.
In this case, the shareholders aren’t liable for the actions and financial responsibilities of the corporation.
The best thing about Corporations is that they are allowed to own assets, enter into contracts, borrow money from financial institutions, sue, and be sued.
Forming a corporation is costlier than a Sole Proprietorship and Partnership though. Plus, there are risks of double taxation. There is also a lot of documentation thus you need to hire an accountant.
Choosing the best business entity is not a tough task with the right guidance.
The most important thing when starting a retail business is to understand the different types of business structures there are out there as well as their good and ugly sides.
We hope this article will give you good guidance.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.