Choosing the wrong entity for your business can be like putting the wrong engine in your car. It can still technically run, but the trip might not go the way you expect. One of the most crucial times for any small business owner is during its business planning stage, which includes choosing the right business entity (also known as a “business structure”). Deciding which entity is appropriate for your business can determine the business’ licensing requirements, investment opportunities and even how it pays taxes. For this reason, choosing the proper entity is a critical piece of building your business’ future success.
Patricia Tsai is the owner of ChocoVivo, a retail and wholesale chocolatier located in Culver City, Calif. As she explains in the video below, the decision to form a limited liability company (LLC) over an S corporation (S-corp) was motivated by her desire to include investors as her business scales. Aside from leaving the door open to future investment opportunities, Patricia’s decision also included some unforeseen tax realities unique to an LLC. Because she historically focused on reinvesting as much of her profit as she can back into her business—so much that she doesn’t take a full salary—Patricia’s structuring decision had a material impact on how she now approaches reinvestment.
Being a small business owner is not for the feint of heart. It can be a constant uphill battle that takes years of discipline and hard work. That said, choosing the right business structure can facilitate that, allowing you to grow your business on your own terms. That means asking yourself if your business’ future includes outside investors, special equity-related tax considerations or corporate liability protection. After all, your business may be small, but that doesn’t mean your plans for the future should be.