Which Entity is Best for Operating a Retail Business

 

Tax benefits, liability protection, and ease of raising capital are just some of the things you have to think about when choosing a business structure.

Dealing with these issues can be made easier or more complicated by the type of business entity you choose to operate your retail business.

There are three main entities to consider:

• Sole Proprietorship
• Limited Liability Company (LLC)
• Corporation

Let’s check out the pros and cons of each.

Sole Proprietorship

It is owned and run by one person. It’s a type of unincorporated business.

You don’t need a legal name when operating a Sole Proprietorship, but you can get a trade name. This post by GovDocFiling shows the difference between a legal name and a trade name.

Pros

• They’re the easiest entity to form as it requires very little paperwork.
• Running a Sole Proprietorship is easy and has the least strict compliance requirements.
• You don’t need to pay corporate taxes, as the business income passes through to your personal income.

Cons

• As a sole proprietor, you could lose your personal assets to business liabilities.
• You can’t operate your retail business as a franchise.

Limited Liability Company

A Limited Liability Company lets you operate your retail business as a private company. It’s formed by filing the articles of organization with your state.

A Limited Liability Company combines the characteristics of a Sole Proprietorship and a Corporation and gives you the best of both worlds. Checkout LLCBuddy to learn more about LLC registration procedure.

Pros

• Similarly to a Sole Proprietorship, income from the business passes to your personal tax returns.
• You get liability protection as your personal assets are protected from the liabilities of the retail business.
• You are free to run your retail business as a franchise or open as many branches as you need.

Cons

• You can’t go public or distribute shares to your employees
• You’ll need to pay a yearly state filing fee. 
• In some states, you may also need to pay LLC taxes.

Corporations

These are separate and distinct entities from their owners. You form a Corporation by filing the Articles of Incorporation with your state.

A retail business formed as a Corporation possesses the same rights and obligations as an individual. It can get into a contract, own assets, take loans, and sue or be sued.

Pros

• It provides the best liability protection, better than LLCs.
• Being a separate legal entity, a Corporation is perfect for operating a franchise or opening multiple storefronts.
• You can raise funds easily by issuing shares to investors.

Cons

• Forming and running a Corporation is complicated and you have to maintain comprehensive business records.
• You’ll be subject to high corporate taxes.

Ready to Choose the Right Business Structure?

Choosing an entity to operate your retail business is a major step. It’s important to assess the pros and cons of each entity and choose a business that’ll benefit your business the most, now and in the future.

Have a look at this infographic to learn more about each entity.