How To Pick A Business Structure
There comes a time when every corporation, no matter its size, must figure out how it will legally operate. Choosing a corporate structure for your new company can be challenging. Here’s an overview on some things to consider when picking a business structure for your organization.
Liability
Sole proprietorship is simplest if you’re running a small business on your own. However, you will have to review your future plans to determine if you’re willing to assume a high level of legal risk going forward if you decide to expand your team.
Limited Liability Companies (LLCs) are best for entrepreneurs who operate on a small scale but still want to stay separate from the business’s liabilities. General partnerships and corporations, on the other hand, let you delegate liability among partners and shareholders. Carefully consider how you want your company to grow and potential legal issues before picking a corporate structure.
Flexibility
Sole proprietorship is a great option for a single-person business if you value adaptability. A general partnership is similarly flexible, although responsibilities and control is split between the owners. LLCs are light on paperwork, although different operating agreements could limit your activity, even prohibiting investors from putting money into your company.
Corporations are far less flexible, requiring the owner(s) to file complicated state and federal documents and are governed by complex rules and regulations.
Expense
Managing costs is essential for any business, and it’s an important consideration when it comes to determining your company’s structure.
Sole proprietorships are the cheapest upfront, although you shouldn’t forget to take into account having to pay income and self-employment taxes on your income if your business turns a significant profit. General partnership is much the same, with the added caveat that any issues with taxes or expenses will be inextricably linked to you as one of the proprietors of the business.
While LLCs only require simple paperwork, their fees can get complicated and expensive. For corporations, specific cost is more difficult to calculate and might depend on corporation type: for example, C corporations experience double taxation, while S corporation requires a “reasonable salary” for shareholders, which might tip the balance toward a loss instead of profit. Accounting for a coloration is complex, and some business owners may not want to take on that responsibility.
The above are some considerations for picking your corporate structure. Ultimately, you are the only one who can decide what type of business you want to run.
