Types of Business Structures For Aspiring Construction Entrepreneurs

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When architects put together an arched doorway, they have a plan for distributing the weight and making a stable structure. The last stone they place at the top of the arch is called the keystone. This stone holds the whole arch together and protects the people who walk through the door.

Choosing the right business structures for your entrepreneurial goals is like adding the keystone to your business. The appropriate design for your company will set boundaries that protect you and increase the financial success of your venture. Here are five types of business structures for aspiring entrepreneurs in construction to consider.

1. Sole Proprietorship

If you’re planning to work alone, a sole proprietorship may be best for you. Registering as this type of business includes all earnings on your personal income tax return. You make estimated quarterly tax payments four times a year before finalizing your annual taxes with a self-employment tax form.

This business structure is simple — it requires very little paperwork and you have complete control over business decisions. However, because your company isn’t separate from your personal assets, you could lose everything if someone sues you.

Raising money from banks or investors to get your business going may also be challenging. However, the application process is worth it when you have a solid business plan, a good product or service, and are ready for funding.

2. Partnerships

Partnerships are slightly more complex than sole proprietorships. As their name suggests, multiple people run them instead of one boss. Sometimes partners serve as passive investors instead of equal partners in the business. Legal forms dictate each partner’s role so that leadership responsibilities are clear.

There are definite tax benefits to running a partnership. Profits initially “pass-through” to partners without tax, then they pay on business income as part of their personal income tax return. However, partnerships require more paperwork and don’t protect owners from personal loss if the business is in the event of a lawsuit.

3. LLCs

Limited liability companies are another option for small businesses. Many entrepreneurs choose to create LLCs because they combine tax benefits with liability protection. Similar to a partnership, LLCs are only taxed when their owners pay personal income taxes. What’s different is LLCs also protect their owners from personal liability if someone sues the company.

Because of this legal protection, LLCs can attract investors and are a good option if you need to raise money for your business. They’re also a popular structure for franchise owners who would like to exercise flexibility as owners as part of the larger corporation they’re part of. However, if the initial business owner leaves, an LLC may need to restructure completely. In some cases, you can also lose liability protection as an LLC owner.

4. Corporations

This business structure creates a legal entity separate from its owners. Corporations can outlive their owners and don’t endanger their personal assets. They can sell stock and attract investors easily. Many large businesses with lots of employees choose to structure themselves as corporations.

However, there are some drawbacks to this business structure. Corporations are expensive to create and require constant paperwork. Business earnings are also taxed twice — once when the corporation earns them and again when owners pay personal income taxes. The financial protection may not be worth this loss in income to some entrepreneurs.

5. S Corps

S Corps stands for small business corporations. This type of business structure combines the legal protection of a large corporation with better tax breaks. Owners only pay taxes once as part of their personal income tax. Because of its legal structure, an S Corp can attract investors and make it easier for you to open your company.

Because corporate structures are more complicated, a small business corporation can be more expensive to create than an LLC or sole proprietorship. They require a lot of meetings and paperwork, and the IRS closely scrutinizes them. There are also regulations on the type of stock S Corps can offer and what kind of entities can invest in them.

Structuring Your Business is a Critical Step

Choosing the right business structure for you will take some time and thought. Consider how large you want to become and whether you need an investor’s help to begin. Will you get liability protection for your company? What tax structure seems best to you? You may want to speak with an attorney and an accountant before making significant decisions.

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