Personal Finance

Business Is Booming. What Kind Should You Start?

Starting a business in today's economic climate can seem like attempting to navigate a minefield while blindfolded—you never know when rising interest rates or slowing economic growth will blow up in your face. 

But if you’ve been considering building your own business, don’t let this economy stop you—because it sure isn’t stopping other entrepreneurs! The latest numbers from the U.S. Census Bureau on business formations, measured by applications for Federal Employer Identification Numbers, show the number of businesses in the U.S. continues to grow (More on that in a moment).

Sure, not a single one of these budding companies is guaranteed to succeed—and, since we value brutal honesty, the same goes for you. But, with some savvy strategies and a dash of creativity, you can put your business on a favorable foundation that should improve your chances of surviving an unpredictable economic landscape.

Today, we’ll take a quick look into what the latest business formation data show and where growth is strongest. And from there, we’ll teach you about one of the most basic but vital steps in starting a business: choosing a business structure.

The Tea

Starting a business can be a daunting task regardless of the economic environment, but you’d really expect people to back down from the challenge when flocks of financial experts are predicting a recession this year or next.

And yet …

The latest U.S. Census Bureau business application and formation statistics show a recent increase in business applications across the country. Specifically, the data from May 2023 reveals a 0.4% month-over-month increase in the total number of new business applications filed. This indicates a willingness by individuals to take the risk and start their own business, even in an uncertain economy.

YATI Tip: Some side hustles are good for a few bucks. But others, you can grow into your own small business.

That wasn’t a uniform gain across the country, mind you. The majority of growth occurred in the Western, Midwestern and Northeastern regions of the United States—essentially everywhere but the South, where business formations actually contracted by 2% MoM.

Interestingly, the area of the economy experiencing the most growth in terms of business formation? Retail Trade, which saw a notable 3.4% increase from April 2023, leading all other industries in growth of new business applications. That’s evidence that, despite persistent inflation concerns, consumer spending remains strong enough to entice thousands of new business owners to grab at their own slice of the American consumer pie. If you plan to do the same, you need to start on the right footing. That’s why, before you make virtually any other decision, you should determine what kind of business structure you’ll operate under.

And trust us: It matters.

The Take

In our opinion, one of the reasons for the increased business formation rates is the ease with which people can start a business nowadays. With the rise of online business formation services, it is easier than ever to establish a business entity quickly and affordably. In fact, online business formation companies offer step-by-step guidance on how to start limited liability companies (LLCs), C corporations, and the like, and provide resources such as customizable articles of organization and operating agreements. 

When it comes to choosing the ideal business structure, however, it can be easy to get lost in a sea of options and guidance. This is where an online service such as Doola comes in handy, as it offers comprehensive comparisons between different business structures such as sole proprietorshipspartnershipsLLCs, and C corporations. (And in addition to business structure comparisons, it offers a range of other resources, including compliance guides and business name availability searches, all aimed at helping entrepreneurs get their business started.)

Services like these help entrepreneurs weigh the pros and cons of each type of structure and choose the best one that fits their business needs.

Why does this matter? Well, check out some of the differences among the most popular business structures:

Sole Proprietorship

sole proprietorship is the most common type of business structure due to its simplicity and lack of paperwork. Sole proprietorships are owned and operated by a single individual with no legal distinction between the owner and the business entity—meaning all profits and losses flow through directly to the owner’s tax return. This means the owner not only enjoys all profits from the business, but is also personally responsible for all debts, losses and liabilities, not to mention the work itself.

YATI Tip: When it’s time to do taxes for your newly minted business, consider investing in tax software.

Who It’s Best For: Sole proprietorships are typically suited to individuals starting a small business with low risk, where the chances of incurring substantial debts or liabilities are minimal. It's also a good fit for people who want to test a business idea before forming a more formal business structure, such as an LLC or a C corporation. These are commonly the types of businesses freelancers, side hustles, gig workers and some independent contractors organize, though it depends on the level of risk involved and whether the business owner will need to secure financing to operate the business.

Partnership

partnership is a business structure where two or more individuals share ownership of a business. In a partnership, each partner contributes to the business, including money, property, labor and skills. In fact, partnerships often result from people interested in going into business together and choosing to employ their specialized skills which may complement those of the other partner(s). All profits and losses flow through directly to the partners’ respective individual income tax return.

Who It’s Best For: Partnerships can be a good choice for several situations. They are often favored by professional services businesses, such as law firms and medical practices. They can leverage the trained skills, available resources and broad networks of each owner to increase the chances for business success. Partnerships do pose some risks, however. For instance, they do not shield owners from legal liability, and dissolving partnerships can be difficult (legally and emotionally).

Limited Liability Company (LLC)

limited liability company (LLC) is a business structure that combines elements of sole proprietorships, partnerships and corporations—explaining their popularity across the country. This structure, organized at the state level, provides the owners (also known as members) with limited liability protection. This means members are not personally responsible for the company's debts and liabilities. That’s a huge benefit for businesses interested in securing outside capital to grow, or owners with significant assets they’d like shielded from liability. All profits and losses flow through directly to the individual tax return(s) of the owner(s).

Who It’s Best For: LLCs can be a good fit for medium or higher-risk businesses, owners with significant personal assets they want to be protected, and owners who don’t wish to be taxed as a corporation. An LLC is also a good choice for business owners who plan to raise money, grow, and potentially go public in the future (Though C corporations are generally a better choice for going public).

YATI Tip: Thinking about getting into the real estate business? Here’s how to become a landlord.

C Corporation

C corporation, often referred to as a C corp, is a business structure that is legally considered separate from its owners. This means the corporation’s shareholders are responsible for any liabilities or obligations it incurs. The C corp is also the only business structure that has a federal tax, called the corporate income tax, levied on it. This can lead to what is called double taxation, when the corporation pays taxes on its profits, then shareholders pay taxes on their personal returns for the distributions they receive.

Who It’s Best For: C corporations are best for businesses that intend to grow with outside capital and have multiple shareholders. There aren’t restrictions on the number of shareholders a C corp can have. Lastly, they’re good for businesses that plan to reinvest their profits back into the company, since the corporate tax rate may be lower than the individual tax rate a business owner would need to pay though a pass-through entity like an LLC.

Obviously, starting a business involves a boatload of other steps. But deciding upon a business structure is one of the first—and most important—steps you need to take.

We wish you good luck, and we’ll see you next week!

Riley & Kyle

Young & The Invested (Soon to be WealthUp)

Like what you're reading? Get our weekly financial insights and updates delivered to your inbox every Saturday morning by signing up for The Weekend Tea today!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Entrepreneurs

WealthUp

WealthUp is a growing online community where people can improve their financial literacy, and by extension, learn how to become smarter about saving, spending, and investing their money.

Learn More