In this blog post, the Island Institute’s Economic Development staff share the benefits and risks of small business structures: sole proprietorship, LCC, cooperative, and S Corp. To easily find future posts in this blog series for island and coastal small businesses, go to the blog home page and select “economic development” from the drop down menu to filter blog posts by this topic, or go to islandinstitute.org/blog/economic.
WHAT WE DO
To help ensure resilient businesses in remote coastal and island communities, the Island Institute’s Economic Development program shares existing resources with business owners and employees. Our staff do not provide legal or accounting advice; similarly, the content of this blog post is for informational purposes only. We encourage you to use us as a networking resource by contacting Stephenie. In October 2015, the Cooperative Development Institute presented on cooperative business structures, which was hosted by the Vinalhaven Chamber of Commerce. The Island Institute sponsored the event, and this blog post shares some of the information that was presented.
Benefits and risks of business structures
There’s been a lot of buzz around the idea of cooperatives.
These can actually take many different forms, but generally cooperatives are categorized as one of three types:
- A consumer cooperative is a group joined together for purchasing power that benefits these consumers, like an electrical coop.
- A business cooperative saves a group of businesses on expenditures, like a group of farmers doing bulk purchasing or a group of retailers sharing administrative work. Worker cooperatives are businesses owned by the employees.
- Producer cooperatives are formed to increase production whether through joint marketing, shared storage or processing facilities, and/or streamline distribution, think lobster coop.
The Business Ownership Solutions program at the Cooperative Development Institute helps business owners and employees consider these many options.
Starting a cooperative is not unlike starting any business, says Rob Brown, who directs the BOS program. It requires owners to articulate goals, identify leaders who can make time commitments, secure board members who supply a variety of skills, determine needs, develop a business plan, and articulate how the business plan would meet the needs and goals identified. Rob shares stories that illustrate the importance of basing decisions (including whether or not to use a cooperative structure) on market research and on the business plan, not on just opinions or ideology.
Other legal structures include sole proprietorship, LLC, and S Corp.
Most small businesses are formed initially as sole proprietorships, rather than as a Limited Liability Company or as an S Corporation, because it is the simplest form for a business to take. It is also the most risky to the business owner, because he or she is personally liable for the business, threatening personal assets such as a home. As a sole proprietorship, business and personal finances tend to get combined instead of keeping checking accounts separate. Sole proprietors may also find it difficult to seek financing or appear professional.
Forming a Limited Liability Company avoids being personally liable for the business. An LLC structure is not right for every business, because the owner(s) would be paid by withdrawing funds from the company. This means that the owner(s) would have to pay self-employment tax, which becomes expensive as the business becomes highly profitable. Being an LLC is simpler than an S Corporation, because the owner doesn’t have to file a tax return for the company in addition to the personal tax. That can result in savings from attorney and accountant fees.
After a certain amount of time, or for businesses that are highly profitable, it may be more advantageous to form an S Corporation (named for the IRS subchapter S). The major benefit of an S Corp is that the owner is paid a reasonable salary on a regular basis, avoiding the self-employment tax. Plus the profits are paid to the owner(s) as dividends, taxed at a lower rate than income. It is more expensive to form an S Corp, and most often owner(s) pay accountants to ensure business finances are in order.
Your attorney and accountant can provide more insight on how these various business structures could benefit you. Be sure to seek their advice before making any changes to your business structure.
Consider your options:
- Watch a free workshop on Why New Businesses Should Form a Legal Structure by SCORE.
- Visit the Secretary of State website to find out more about business structures and how to incorporate a business in Maine.
- Attend a workshop on Starting Your Own Business in Machias sponsored by CEI.
- Attend an SBDC workshop on April 19 in Rockland or April 28 in Brunswick.
Business formation and taxation resources:
- Business structures described by the US Small Business Administration
- Detailed overview of business structures by SCORE
- Self-Employed Tax Center of the IRS
- Maine-specific checklist for new business by SBDC.
- Coop Resources from the Cooperative Development Institute