An owner’s choice of business structure can have wide-ranging impacts, including how the business is taxed, how protected the owner is from liability and what kind of reports and business processes are required.
Choosing a structure for a business can be easier with advice from professionals. Erik Moore, Chief Investment Officer with Moore Wealth Inc., an investment adviser in Frederick, Maryland, said he works with business owners and their accountants to make sure they’ve got the right structure for their businesses.
“We’re going to try to understand as much as we can about every one of these business owners’ personal lives as well as how their business runs,” Moore said.
Among the questions Moore asks: How many owners are there? How many employees are there? What are your personal goals for the business? How do you plan to exit the business later? Some business structures can be more beneficial down the line depending on the answers to those questions, Moore said.
After that, the question is, “how do we go from there to create the best scenario for them to save money long-term, invest money in the best way, and then … anything they can put out to their employees, also,” Moore said.
Most of the clients Moore works with already have ta business structure that makes sense, but for about a quarter of clients, Moore said after conferring with the client’s accountant, he may suggest a different structure to the client.
“Usually, the answer they have is … ‘you know, I’ve meaning to get to that,’ or ‘Oh, I never even really thought I could do that,'” Moore said.
Here’s a look at five businesses and the organizational structures they chose. While the circumstances of each business in this story played into their decision, a common thread among each business is that they made their decisions with the help of advice from experts.
The ‘side hustle’
Gina Brelesky has been in the human service field for most of her career, doing direct support for people who have intellectual and developmental disabilities, and working as a corporate educator. Through her work, she has met people that have asked her to help out with projects for other businesses.
“I ended up creating this side hustle, actually,” Brelesky said of her coaching and consulting business in Harford County, Maryland. While she’s been employed full-time for the past 35 years, she’s worked with other teams to help them with their goals. “It really just came out of something I absolutely loved to do,” which is learning development.
“I still work full-time. I am at what I would I would say is the third act of my current career,” she said. “So as that third act comes to a close, then my business will be online full-time.”
Because Brelesky doesn’t want the job to grow too quickly — “I don’t have quite enough energy for two full-time jobs,” she said — and with advice from a small business program about what makes the most sense for her right now, she chose to stick with the business structure automatically given to people working for themselves: sole proprietor.
“I don’t have any employees,” she said. “I am … the only person really doing anything in terms of this business.”
Brelesky said she gets the most requests for one-on-one coaching, and she plans to increase the number of coaching clients in the future. She envisions the next five years as a time of laying the ground work for working with more clients, with an aim of picking up the pace in perhaps three years. She is considering conducting business also in Hawaii, Montana, and may even end up in some sort of partnership. She says it’s possible she may need a different business structure later.
Dustin Hewit has about two decades of experience in communications for hospitals, health care, economic development and other fields. He began working on forming his business, Long Run Communications, in April 2018 and launched it formally in July 2018 from his home in Corning, New York.
Hewit does writing and communications planning. Some clients already have a marketing plan and need him to write something for a website or annual report. Others don’t have those plans already made, so he works with clients to figure out their goals and intended audiences, and comes up with a way to achieve their objectives.
“At this point it has built up lots of interest and great support from folks that I’ve known,” Hewit said. “It just seems to fill a niche.”
There’s another part of his business that took off, almost by surprise to Hewit: adult training and education facilitation. Sometimes he manages communications for the education programs, and other times he’ll be in the classroom teaching.
“That’s been a really nice additional part of the business,” Hewit said. “I really enjoy it a lot and I get to work with some great people who are doing really, really cool stuff.”
Hewit’s accountant recommended he choose a sole proprietorship for Long Run Communications. It cost him nothing, and it was very quick for him to set up. Though other business structures can reduce a business owner’s liability, Hewit says he is covered: he has liability insurance to protect him.
“Even though that’s not required, it is advised. And it’s also, frankly, required for some of the contracts that I have. So that allows me to get some work that I would not be able to get if I weren’t insured, and also it does protect me.”
Hewit is pursuing new business, but he’s almost at full capacity, and that’s fine by him. “The business is doing exactly what I want it to be doing,” said Hewit, who is moving into new office space in July. Any change in structure in the future will depend on advice from an accountant and an attorney, he said.
Dan Schepleng began freelancing as a graphic designer in 2015, working for different agencies. He also worked in-house at an e-commerce fulfillment company, developing the company’s branding.
One day he went on a beach trip and began to think about his goals for freelancing. “I was like, ‘I need to do something. Either I need to go get a real job or or grow this into an agency.'”
Schepleng chose to build an agency, and started Kapowza, a creative marketing firm in Baltimore that does graphic design, video and digital media for its clients.
To grow, he worked in-house at the e-commerce company for two days a week, and spent the other three working on Kapowza, eventually transitioning that company to Kapowza’s first client.
Schepleng hired two part-time employees: a graphic designer and an account executive, as he grew the company cautiously into the full-time shop it is today.
I have worked at some places that had cash flow issues, and I’ve seen a lot of mistakes made by other agencies trying to grow too fast,” Schepleng said of starting small and growing steadily. “Now, a couple of years later (after starting the business), we’re about to be four people and we have a beautiful little office” in the Natty Boh Tower in Baltimore.
When Kapowza started, Schepleng stayed with the sole proprietor structure for a while. Under the advice of an accountant and a lawyer, and based on what he told them he wants Kapowza to be in the next 30 years, Schepleng chose an S-corp for Kapowza. “I wanted to add partners,” Schepleng said. “I wanted to be able to grow.” In the long term, Schepleng sees Kapowza growing to other markets, or perhaps even to Europe.
Aside from the tax benefits of the S-corp structure, there’s an intangible benefit for Schepleng, who has previously owned limited liability companies. “There’s something about being an actual incorporated company that feels a little different,” he said.
The community hub
Randi Hewit, who is married to Dustin Hewit, is leader of a philanthropical nonprofit organization. In the city where they live, Corning, New York, there was once a women’s center that operated as a nonprofit, but it closed perhaps 15 years ago.
After the 2016 general election, women and feminists in the community thought they needed a place like the women’s center again. “But I knew from my world of philanthropy that that business model, it doesn’t work,” said Randi Hewit. “You can’t keep the lights on without some kind of revenue stream.”
Randi Hewit’s plan was to figure out a working business that could double as a women’s center, so she worked with her best friend, Sarah Blagg, to develop Card Carrying Books & Gifts, a feminist bookstore in a historic shopping district that serves as a meeting space for community events.
“We set out to create a business plan and then open a business that would give all the resources and referrals you need for a healthy feminist community and allow the place to stay open.”
Working with an attorney, the pair considered their options, including a benefit corporation, sometimes called a B corp, which would be driven both by mission and profit, but decided that option was too complicated for them. An attorney advised them to choose an LLC.
Initially, the plan was for both friends to be equal partners in the LLC, but the decision that ultimately made the most sense was for Hewit to be the owner of the LLC and for Blagg to be the only employee. “That just simplified everything, as far as filing was concerned,” said Hewit.
Since the shop opened about two years ago, it has hosted Girl Gang, a “feminist youth group” that meets a few times a month, a sex education class, civil rights education for student protesters, beer tastings, author visits and other events.
“We started this business in order to make sure we had a place for people to gather and organize and feel safe,” said Hewit. “And the business itself is growing. … I’m not saying it’s making a lot of profit but it is. We are selling a lot of books.”
The storefront is the only independent book store in the region that sells new books, Hewit says. She also sees a growth opportunity in the store’s online subscription services, which can provide revenue when foot traffic traditionally slows during colder months.
The investment advisors
Moore Wealth, the investment advice firm, chose a C-corp for its structure. It made the most sense for the company from a tax perspective and also because of the savings vehicles the company uses that lets it grow money over the long term before distributing it to employees.
Each person at the firm is an employee, including the owner, his mother, Shabri Moore, Moore said.
“The corporate tax rate is lower than a lot of our personal ones so that ends up working out in our favor,” Moore said.
Business owners have options for organizing their businesses. Choosing the right structure depends on each business’ circumstances, and the desires of the owner or owners. There’s no “one right choice” for business, but business owners who make an informed choice are in a better position to be well-served by their decision over time.
Choosing the right structure for a business is part of the planning that Moore focuses on with business owners.
“We’ve kind of found this niche of working with business owners because the planning is more important, really. (It’s) something we can actually control. Markets kind of do what they do.”
Businesses that don’t register as any other kind of business are automatically known as a sole proprietorship. There’s no separate business entity, so the business’ assets and liabilities aren’t separate from personal assets and liabilities.
Partnerships are an easy way for two or more people to own a business. Limited partnerships have one general partner with unlimited liability, while other partners have limited liability and limited control over the company. Profits are passed through to personal tax returns. The general partner must also pay self-employment taxes. Limited liability partnerships give limited liability to each owner. Each partner is protected from debts against the partnership and each partner isn’t responsible for the actions of other partners.
Limited liability company An LLC protects a business owner’s personal liability. Personal assets won’t be risked if the LLC loses a lawsuit or goes bankrupt. Profits and losses can be passed through to personal income. LLC members must play self-employment taxes.
corporation, sometimes called a C corp, is a separate legal entity from its owners. It can make a profit, be taxed and can be held legally liable. Sometimes, profits can be taxed twice: when the company makes a profit and when dividends are paid to shareholders. Corporations can raise money through the sale of stock. They have strict filing and operational processes. An S corporation is designed to avoid the double taxation that occurs in C Corps. They let profits and some losses pass through to owners’ personal income without being subject to corporate tax rates. S corps can’t have more than 100 shareholders, and each must be a U.S. citizen.
Source: U.S. Small Business Administration