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MAKE IT MAKE CENTS

Soft skills refer to a set of personal attributes, behaviors, and social attitudes that enable individuals to interact effectively with others in a workplace or social environment. These skills are essential for building healthy relationships, communicating effectively, solving problems, and collaborating with others.

an expense that a you can subtract from adjusted gross income, reducing the amount of taxes owed

tax that is withheld from an employee's paycheck and paid by the employer to the government

The Building Blocks of Business:
A Guide to Business Structures

APEF: Solving the Financial Illiteracy Crisis

an amount of money set aside as a financial safety net for unexpected expenses, usually recommended to be approximately 3-6 months worth of expenses

So you've got a brilliant business idea – congrats! But before you dive headfirst into the world of entrepreneurship, there's one important choice to make: your business structure. It's an important decision– you’ll want to choose one that protects you from legal and financial risks while allowing you to achieve your goals. Luckily, there are many different ways to set up a business so let’s take a look at your options.


Me, Myself, & I: Sole Proprietorship


Think of yourself as a lone wolf, venturing out with just your skills and determination. A sole proprietorship is the simplest structure, where you and your business are one and the same. It's easy to set up and requires minimal paperwork, perfect for freelancers, consultants, or hobby businesses. Since it’s just you, you’re in complete control! But you also have all the responsibilities that come along with a business.


Pros:

  • Easy and inexpensive to set up

  • You have complete control over your business

  • No taxes on the business itself (profits are taxed on your personal income)


Cons:

 

  • Unlimited personal liability: you're personally responsible for all business debts and losses

  • Difficult to raise capital

  • Limited growth potential


Teamwork Makes the Dream Work: Partnership


Two (or more) heads are better than one, right? A partnership is ideal for ventures where collaboration is key. You and your partners share profits and losses based on your agreed-upon contributions (you can split everything 50/50 or one person can take on more risk). Just like in any team, clear communication and a strong partnership agreement are super important to help avoid future conflicts.


Pros:

 

  • Shared skills and resources

  • Easier access to funding

  • No corporate taxes (profits are taxed on individual partners' income)


Cons:

 

  • Unlimited personal liability for all partners (and each partner is individually liable for the partnership's debts)

  • Potential for disagreements 

  • Complexities in profit-sharing and decision-making


Go Big or Go Home: Corporation


Think big, think… corporations! This business structure is a separate legal entity from its owners (shareholders). Corporations offer the strongest liability protection but come with more formalities and regulations. They're ideal for large businesses with multiple investors and ambitious growth plans. This might not be right for you starting out, but if that dream idea takes off, you might need to start thinking big!


Pros:

 

  • Strongest limited liability protection for owners (that’s you)

  • Easier access to capital through issuing shares

  • The business will continue to exist, even if it’s sold to someone else


Cons:

 

  • It’s the most complex and expensive to set up and maintain

  • Subject to double taxation (for individual shareholders and the corporation as a whole)

  • Stricter regulations and reporting requirements


Shields Up! Limited Liability Company (LLC)


Combining the best of both worlds, an LLC offers the flexibility of a partnership with the limited liability protection of a corporation. This means you and your co-founders can have personal liability protection for business debts and losses, but you still enjoy the benefits of pass-through taxation (no corporate taxes). An LLC is a popular choice for small businesses, startups, and family-owned ventures.


Pros:

 

  • Limited personal liability for all members

  • Pretty simple to set up and maintain

  • Flexible structure and profit-sharing


Cons:

 

  • More complex than a sole proprietorship or partnership

  • Potential higher filing fees and annual costs

  • May not be suitable for businesses seeking venture capital


Sharing the Spoils: Cooperative


A Cooperative is a business owned and democratically controlled by its members, who work together for everyone's benefit. That's the cooperative spirit – collaboration over competition, shared success over solitary wealth. Cooperatives are ideal for ventures driven by social impact, local sustainability, or ethical production. They're perfect for groups with shared values and goals, from farmers' markets to community arts centers to worker-owned factories. If you're an entrepreneur who values collaboration, fair distribution, and community benefit, a cooperative might be a fit for you.

 

Pros:

 

  • Every member has a say in running the business, fostering a sense of ownership and shared responsibility.

  • Profits are distributed proportionately, ensuring everyone's hard work is rewarded.

  • Cooperatives often cater to specific needs within a community, contributing to its social and economic well-being.

  • Shared decision-making and distributed profits make cooperatives more resistant to economic downturns.

 

Cons:

 

  • Reaching consensus with multiple members can take time and effort.

  • Some cooperatives prioritize social goals over expansion.

  • Traditional investors may be hesitant to fund businesses without a single owner.


Giving Back: Nonprofit Organization


A nonprofit organization is a business entity that is formed for purposes other than making a profit (hence the name). Nonprofits focus on serving the community or advancing a specific cause.


Pros:

 

  • Tax-exempt status, meaning they are not required to pay federal income taxes

  • Eligible for grants and donations from government agencies, foundations, and individuals

  • Ability to make a positive impact on society


Cons:

 

  • Limited ability to generate revenue through sales or services

  • Some activities and operations aren’t permitted if you have tax-exempt status

  • Reliance on donations and fundraising for financial support


Choosing Your Structure: It's All About Fit


There is no single, ideal business structure solution. Instead, finding one should depend on your unique needs, goals, and resources - factors like size/type/risk tolerance/funding plans/goals should all be taken into consideration when making this decision. Consulting with a financial advisor or lawyer can be invaluable when selecting a structure that is most suited to your entrepreneurial journey. No matter the structure of your business, professional liability insurance is an integral component to running an effective enterprise; providing protection in case something goes wrong in your work or with clients who aren't happy with what was provided. Insurance protects businesses against unexpected challenges by covering costs associated with court defense and potential damages payments that might be required if your business is found at fault.


Selecting an effective structure is a critical decision that will determine both your business’s success and longevity. As a high school student embarking on your entrepreneurial journey, understanding the different structures is invaluable in making informed choices aligned with your entrepreneurial goals. From small partnerships to multinational corporations, finding the ideal structure will set up your entrepreneurial journey for success!

 

Bonus Tip: Regulations can change depending on where your business is located. Research state-specific requirements for each business structure before jumping in to ensure compliance.

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