The Best Legal Structure for Your Retail Business
When you first open a retail store, there’s a lot to do. Finding your space, designing your store, ordering inventory, inventory management system, etc.But before you do any of that, you have to register your new retail business.
Basically there are five main business structures:
- Sole proprietorship,
- Limited Liability Company (LLC),
The structure you choose affects more than just the legal paperwork you file for your business — like how the government taxes your business income and the regulations about business organization you have to follow. That’s why it’s important to weigh your options and ensure you select the best structure for your business.
We’ll take a look at what each of the three most common entities means for your business, the pros and cons of each, to help you make the best choice for your new retail business.
A sole proprietorship is the most basic form a business entity can take. Essentially, it means you’re doing business as an individual — registering as a sole proprietorship doesn’t create a separate entity for your business. And if you don’t register as another type of business, you’re automatically a sole proprietor.
As a sole proprietor, your business revenue represents a part of your own personal income, and it’s taxed that way as “pass-through income.” That means you claim business earnings on your personal income tax return and don’t file separately as a business entity. On top of the standard income tax, you’re also responsible for the employer part, covered by an extra self-employment tax.
Benefits of Sole Proprietorship
- No corporate tax
- Unlimited flexibility to run your retail business however you see fit
- All profits pass through to you, the owner
- Personal liability: if your retail business faces a lawsuit, defaults on a loan, or declares bankruptcy, all your personal assets (including your house and your car) are exposed
- You’ll have to pay self-employment tax
- It can be hard to raise outside funding. Sole proprietors can’t sell stock and banks may be hesitant to give out loans
Best Suited For:
A sole proprietorship typically is opted by entrepreneurs that just started their business. Kiryana store owners also prefer this structure for their business.
Limited Liability Company
A limited liability company (LLC) separates your personal assets from your retail business’ assets — when it comes to liability, at least. Forming an LLC protects your personal assets (like your house and car) from being seized in the event your business faces a lawsuit or files for bankruptcy.
As a limited liability company, you’ll pay taxes in the same way a sole proprietor does. The tax authorities consider your business revenue “pass-through income” — it passes through your business and right onto your personal income tax.
Benefits of LLCs
- Your personal assets are protected from most or all business liability
- Pass-through taxation
- Simple and affordable to form. LLCs also aren’t held to any rigid operating or reporting standards
- LLCs members cannot pay themselves wages. Owners receive profits and must pay self-employment tax
- Most states require LLCs be dissolved and reformed should one or more owners leave
- Profits are taxed as pass-through income at the federal level, but many states impose an extra franchise or capital values tax on LLC profits
Best Suited For:
LLCs work best for small- to medium-sized retail businesses. If you aren’t planning to expand substantially or offer stock, an LLC is a great option to protect yourself from personal liability and keep your tax burden lower, without jumping through all the hoops involved with incorporation.
A corporation is the most formal way to structure your business. When you incorporate a business, it becomes a separate entity. You’re 100% protected from personal liability as an individual, but establishing and running a corporation means you have to follow strict operating and reporting procedures.
When you register your retail business as a corporation, your business becomes its own entity, separate and apart from you. As such, a corporation files its own taxes, separate and in addition to your personal income tax. Any wages or dividends you collect from the corporation are subject to your personal income tax, but you won’t pay self-employment tax.
Benefits of a Corporation
- All owners are 100% protected from personal liability
- As its own, separate entity, a corporation can live on and transcend owners
- It’s easier to raise capital through investors, banks, or going public
- Forming a corporation is expensive, time-consuming, and requires a lot of paperwork
- Your management, operating, and reporting procedures are heavily regulated — limiting your flexibility as a small retail business
- Double taxation. Corporate profits are taxed through the corporation and then a second time, in the form of wages or dividends, on your personal income tax
Best Suited For:
If your retail business has aspirations of substantial growth, franchising, licensing, or raising outside capital, incorporating is the best way to go.
Choosing the right legal structure is a vital part of establishing your new retail business. Your business’ structure determines how (and how much) you pay taxes, your personal liability in the event of legal issues or debts, and a whole host of other important factors. So, ensure you’re choosing the right legal structure for your retail business.