There’s a certain simplicity to opening a retail business that appeals to people with an entrepreneurial streak. You buy products wholesale and resell them high enough to earn a profit, never having to answer to a boss again.
The average small retail business owner earns more than $90,000 per year, with many pulling down salaries in the high six figures. But to get to that space of economic and personal freedom, you’ll be tasked with making forward-facing business decisions to get up and running. One of those will involve conducting due diligence regarding registering the retail store as a business entity.
Which Structure Best Suits Your Retail Business?
It’s typically in an entrepreneur’s best interest to register with the state or federal government. In rare cases, someone may be conducting business as themselves, and registering as an entity may not be necessary. But the vast majority of ventures benefit from a formal structure for tax purposes, hiring employees, and other reasons. These are types of business entities suitable for retailers.
Sole Proprietorship
Considered the most straightforward business entity, an individual or a married couple owns and operates the organization. Because a sole proprietorship is the property of one person, or a legally married couple, the profits flow through the entity to its owner. People starting a small retail business generally like the sole proprietorship structure because of the following:
- Not every state requires registration.
- Doesn’t call for intricate corporate filings, bylaws, or recorded meetings.
- Owners can deduct many initial losses from their personal taxes.
- One of the least complicated entities in terms of filing taxes.
Although sole proprietorships are popular ways to start a small business, there are certain drawbacks. Owners may be held personally liable for incidents and injuries that occur in the course of doing business. It may prove difficult to get a small business loan or build credit due to the lack of separation between you and the entity.
General Partnership
Like sole proprietorships, partnerships keep the structure relatively simple. The key difference is that a general partnership has more than one owner. In many cases, the partners manage the operation together and share in the profits. People planning a startup retail store gravitate toward general partnerships for the following reasons:
- Relatively easy to form and not every state requires formal registration.
- Sidesteps the need for bylaws, meeting minutes, and other corporate formalities.
- Partners share initial business losses and may deduct them from personal taxes.
- Each owner is personally liable for the business’s debts and other liabilities.
Among the drawbacks to setting up a general partnership is the fact each individual may be held liable for the actions of another owner. Called “joint liability,” if your partner acts carelessly, you could be the subject of a civil lawsuit. Lastly, general partnerships often devolve into loosely run operations that unravel.
Limited Partnership
A limited partnership is a formally registered entity that requires filing paperwork with the state. Under this business structure, owners who also operate the company may be held liable for incidents and accidents. Those who act purely as investors, also known as “silent partners,” are usually insulated from civil litigation arising from business endeavors. Limited partners typically have little or no control over how the retail company is managed. These are reasons why some startups file as a limited partnership with the state:
- Positions a retail startup to raise money and onboard investors.
- Limited partners can exit the organization without needing to dissolve it.
It’s important to keep in mind that hands-on partners are usually responsible for any business debts and losses. And limited partners who decide to roll up their sleeves and help run the operation may discover they inadvertently vacated their silent, liability-insulated status.
C Corporation
Employing a C Corp model establishes the retail business as an independent entity that operates separately from the owners and investors. In a C Corp, the investors are considered the owners, and the business is controlled by a board of directors. It’s feasible that an individual or small number of people can fill any necessary roles. Although forming a C Corp involves government filings and more complex tax regulations, these are reasons why some choose this entity.
- Shareholders are not necessarily responsible for business debts and liability.
- Owners can reduce their self-employment taxation.
- Ability to raise money and enjoy stock options.
Some of the cons associated with the C Corp tend to steer startups away from this type of entity. For example, owners incur business and personal taxes after doling out quarterly dividend checks to investors. Unlike simpler structures, stakeholders cannot deduct business losses from their individual taxes.
S Corporation
An S Corp is very similar to a C Corp yet has some differences, mainly that it maintains the pass-through tax elements. Small business startups enjoy the limited liability afforded through the C Corp model. But profits and losses are handled more like a Sole Proprietorship. This, and the following, often make it more attractive than a C Corp:
- Owners are not personally responsible for debts and liabilities.
- An S Corp doesn’t usually involve paying business tax.
Retailers who start as a C Corp routinely convert to an S Corp by filing Form 2553 with the IRS. This type of entity can prove suitable for small retail businesses, depending on the products sold and the state’s business environment.
Limited Liability Company
The LLC includes many of the positive aspects of other entity types and packages them in a way that delivers benefits for small retail businesses. The process of creating an LLC generally requires less paperwork and fewer corporate formalities, likening it to a Sole Proprietorship. By that same token, the LLC delivers secure protections against business losses and personal liability. These rank among the most attractive features of registering as an LLC:
- Flexibility to have IRS treat it as a corporation or pass-through entity.
- Do not necessarily have to pay business and personal taxes.
- Can raise capital to expand business opportunities.
This best-of-both-worlds entity remains a popular option for wide-reaching types of businesses. If you are considering a retail store, registering as an LLC can be relatively simple.
How To Register a Business Entity
Registering a retail business has never been easier. There are excellent online resources to help soon-to-be business owners create a legally recognized retail operation. Regardless of whether you prefer to sell your wares at a brick-and-mortar location, online, or a combination of the two, these are the basic steps of registering a business entity.
Select a Business Name
It’s essential to create a memorable name that is not already in circulation. Conduct some due diligence regarding in-state usage, social media implications, and online clarity.
Choose a Business Structure
The LLC provides balanced benefits preferred by retailers. However, it’s crucial to choose an entity that best suits your business needs.
Get An EIN
You will need an Employer Identification Number from the federal government. This can be secured by filling out forms online.
Check Local Government Regulations
Each state has different business requirements. Check with local, county, or state agencies to determine what you need in terms of permits, licenses, and other mandates.
Register Your Retail Business
There was a time when starting a business required entrepreneurs to hire an expensive lawyer to handle government filings such as articles of incorporation. In the event you find the digital entity registering process onerous, there are solutions. Online resources and user-friendly platforms can help shepherd you through the entity filing process.
Benefits of a Registering Your Retail Store
The benefits of registering a retail store as an entity tend to outweigh the informality of a loose operation. In the event your retail store becomes lucrative and well-recognized, it’s possible others could employ the same or a similar brand name. By registering your retail store from the start, you enjoy lasting protections and benefits.
