Retail businesses are one of the most common types of business. They sell products and services to customers. They’re often very successful because they offer customers convenience and value.
However, starting a retail business can be challenging and requires a significant investment. And apart from that, you’d also have to go about the formal establishing procedures.
One of them is choosing the entity for your business among Sole Proprietorships, Limited Liability Companies, and Corporations.
The choice will depend on what type of business you want to run.
Three Main Types of Entities
Let’s take a detailed look at all the three entities that you can choose from.
1. Sole Proprietorship
A Sole Proprietorship is owned by an individual. Additionally, the owner has to be an individual and no other entity. There is no legal distinction between the owner and the business.
The owner has full control over the business. The advantages of this entity are the simplicity and low cost of starting and managing the business.
You also have the pass-through taxation feature that allows the income of the business to flow through to your personal tax return. This helps avoid double taxation.
However, you don’t have any liability protection, which could pose a challenge in getting funding. Additionally, you’d have to pay a self-employment tax.
2. Limited Liability Company (LLC)
An LLC is a legal entity, unlike a Sole Proprietorship. An LLC can have many members (owners) in the company and they can be other entities like other LLCs and foreign businesses too.
Members do not have personal liability for debts incurred by the company. This limited liability feature works well for retail businesses that intend to grow quickly. At the same time, you’re saved from double taxation. However, you’d have to pay self-employment tax along with the income tax.
The advantage of this type of entity is that it allows you to limit your personal liability and protect your assets.
A Corporation is a separate legal entity from its owners just like an LLC. Corporations usually have more complicated paperwork and need to hold annual meetings.
However, this complexity comes with benefits such as better protection against liabilities and the ease of going public and raising funds. This makes it perfect for growing your business to massive proportions.
That said, Corporations have some drawbacks too. You’d be subjected to double taxation. Additionally, running a Corporation is a lot more complicated than other entities. This makes it better for larger retail businesses rather than smaller ones.
Corporations, in particular, are the best if you prefer to open franchises or want to have multiple retail outlets at various locations.
Choose The Right One for You
When choosing a business structure, consider what kind of business you want to run. Sole Proprietorships are often useful for small businesses. If you plan to grow your business, then you may choose to start an LLC with GovDocFiling or a Corporation.
To learn more about the different types of business entities, see the infographic below.