Once you start a business, there are various tough decisions you need to make. One of these is choosing the right business structure. Although you don’t need to overthink it, this can be a crucial step when starting a business.
More often than not, some companies started as sole proprietorships before shifting to more complicated corporate forms. However, remember that your chosen business structure has operational, financial, and legal implications. If you don’t know what business structure is suited for you, make sure to keep the following tips in mind before you start an LLC or a corporation:
1. Know The Different Business Structure Options
There are various business structure options to choose from, and these are the common ones:
- Sole Proprietorship – It’s an unincorporated business owned by a person who reports business profits on their individual tax return. It’s also the most straightforward to start and simplest business structure.
- Partnership – It’s an unincorporated business owned by several owners, either companies or people. Profits are divided among the owners and reported on their tax returns.
- Limited Liability Company (LLC) – It’s a hybrid business structure, which limits the personal liability of the owners, also referred to as members, but the profits are taxed on either a corporate or member level.
- Corporation – It’s another type of business structure that allows an unlimited number of shareholders and multiple classes of stock.
2. Keep Your Industry In Mind
When choosing the right business structure, it’s essential to note the type of industry you operate in. It’s because of the state requirements and common practices. For instance, real estate investment companies carry higher risks. That’s why LLC is widely used because of the liability protection it offers to the owners.
Usually, businesses offer professional services from partnerships because they offer flexibility and are easy to maintain and form. The liability may be unlimited or limited, depending on the kind of partnership.
3. Consider Your Ownership
Owners often desire to hold control over business decisions. The partnership divides the control among various partners, but it offers flexibility. So, partners may decide different responsibilities and rights of all.
In businesses, the directors have control over operational transactions. Due to this, in most private companies, the directors and shareholders are the same.
With the help of your consultant, you may plan your level of control in your preferred structure. However, if you want to get undivided control, it’s wise to opt for sole proprietorship as your business structure.
4. Consider Personal Liability
If you want to choose the right business structure, you should know what liability protection every structure offers. There are several levels of personal liability protection in a limited partnership, LLC, limited liability partnership, and corporation.
With LLC or corporation, the business’s officers or owners won’t be sued, and only the entity will be sued. When it comes to a limited partnership, it’s created by different general and limited partners. A limited partner has personal liability for the company’s debts, but only the amount they’ve invested in the business.
On the contrary, all partners in a limited liability partnership aren’t personally liable for other partners. However, they have unlimited personal liability for your company’s debt. In a limited partnership, the general partners have unlimited personal liability for the business debts. This can be limited by having an LLC or a corporation as the general partner.
5. Think Of Your Tax Situation
The way you set up your business may affect how it’ll be taxed. For instance, if you like your business to serve as a sole proprietorship, you become the company’s sole owner. There’s no distinction between your business income and personal income from the tax perspective, so you’ll report the company’s losses and profits once you file your personal income tax return.
6. Consider Funding
When starting a business and choosing your business structure, it’s essential to consider funding. Typically, raising money for corporations is much easier than coming up with enough capital to launch a sole proprietorship.
While some investors pump money into a sole proprietorship, corporations usually have access to venture various investment opportunities. A corporation may also raise funds by selling the shares of business stock.
Business owners may find it hard to get loans since there’s an unlimited personal liability in a sole proprietorship. Banks may not also lend money to new business owners who could default on loans, experience personal financial losses and lose their company.
7. Determine Your Long-Term Business Goals
The right business structure depends not only on the state of your business but also on where you’d like to be in the coming years. If you want fast growth that takes cash, corporations often allow different classes of stock and never restrict the type or number of shareholders. They can be a perfect option if you want investments from venture capitalists or if you’re planning to be a publicly-traded company.
Conclusion
Overall, there is no perfect business structure. However, if you know what you need and prioritize the most important things to you in a business, it’ll be much easier for you to choose the right structure that fits your unique business needs. If you still find it hard to select the right business structure, you can always ask for help from professionals.
