When you start a business, it can be overwhelming. You need to make important decisions about how your company will operate and what kind of legal structure will best fit your needs.
If you’re considering starting a new business or have an existing one that needs some streamlining, the first thing to consider is choosing a business structure that best fits your operations.
Generally, there are a few factors that will help you make a decision. You should consider all the variables and how they will impact your choice.
Also read Sole ownership – All you need to know.
Choosing a business structure is an important step in the process of starting your business.
It can also be one of the most challenging. A lot of factors go into choosing a structure, including:
What type of company do you want to form? This includes whether or not you want to be an:
- LLC (limited liability company),
- S-Corp (small corporation),
- C-Corporation or
- An LLP (limited liability partnership).
You may also want to consider what kind of tax benefits will come along with each option. For example, if you’re planning on hiring employees and paying them salaries, then it makes sense for them to be classified as employees rather than independent contractors who don’t need benefits like healthcare coverage or retirement plans.
Conversely, if all your clients are individual investors looking at buying stock certificates from your company instead of actually purchasing anything tangible like artwork from their wallets…then maybe having them listed under one umbrella would make more sense?
The decision comes down ultimately to how comfortable you feel about managing multiple entities under one roof, but whatever route leads toward success should always include considerations such as these!
10 factors to consider when choosing a business structure
Choosing a business structure is a major business decision, and as such, the decision should not be made without considering all the facts. Below are the factors to consider before choosing a business structure.
1. What business structure is the easiest and cheapest to structure?
Sole proprietorships are the most simple business structure, but they come with several disadvantages.
- The owner must pay self-employment taxes on his or her earnings and is responsible for all business expenses.
- In addition, if your company has more than one owner or principal shareholder, you’ll need to prepare tax returns separately for each person who owns stock in the company (and pay them accordingly).
Partnerships offer many benefits over sole proprietorships.
- They provide liability protection for partners’ assets;
- They can allow for better communication between partners because there are multiple people involved; protect property rights of partners’ interests;
- They have no requirement for filing annual reports with state agencies like banks do when opening a checking account;
- They eliminate costly accounting needs by having one person file an income tax return instead of multiple individuals doing so individually – just make sure that everyone gets their fair share!
Corporations offer several advantages over partnerships such as:
- Protection against personal liability issues due to fraudulent acts committed by employees/agents under their employment contracts signed before joining up together and forming this entity.
2. What do you want your business to provide you financially?
- What do you want your business to provide you financially?
- How much money do you need to make to survive?
- How much money do you want to make for yourself, or for your family?
You should also consider privacy when choosing a business structure. If you are not comfortable with the public having access to a lot of information regarding finances and business operations, you should adopt a sole proprietorship or partnership business structure. Corporations are required by law to disclose their business operations and finances.
3. Consider the pros and cons of each type of business structure
Consider the pros and cons of each type of business structure when choosing a business structure.
- Sole proprietorship: This entity has one owner, who is responsible for all business activities. The owner owns all assets, liabilities, and profits from the business.
- Partnership: A partnership is an unincorporated association between two or more people that have interests in a common enterprise for profit or not-for-profit purposes (like a church). Partnerships can also be formed by corporations as well as individuals who are not limited liability companies (LLCs).
- Corporation: When you form a corporation, you give up your personal assets so that another person or group can enjoy tax benefits when they make decisions about how your company should operate. However, if something goes wrong with the corporation’s finances then only those shareholders who contributed money towards its founding will be liable for debts incurred during its operation.
- A limited liability company offers similar protection but doesn’t require any capital contributions from its members individually; instead, it limits their exposure solely based on their shareholding percentage within such an organization.
4. How many owners will be involved in the business?
There are three different ways you can structure your LLC:
- Single-member LLC: A single-member entity is totally owned and operated by just one person. If this sounds like what you’re looking for, then this might be the best option for your business structure.
- Multi-member LLC: A multi-member entity has more than one owner but still operates as an independent entity from each other owner’s perspective (i.e., it doesn’t matter who owns what). This type of setup could also make sense if there are multiple owners who want to delegate some responsibilities or responsibilities themselves without having full control over them (for example, some may want their own office while others prefer working remotely).
- Sole proprietorship: Finally, there’s a sole proprietorship which means that everything—from day one—is owned by just one person!
In a sole proprietorship, the owner has more control over the business than in any other business structure. The owner has a lesser degree of control in a partnership, while in a corporation, only the members of the executive board have the decision-making rights.
5. What business structure will you be able to expand easily?
When choosing a business structure, it’s important to know if you’ll be able to expand easily. The most common business structures are sole proprietorship, partnership, and corporation.
If you’re starting a new business or have an existing one that needs to grow, then it’s best practice to consider incorporating (if applicable).
6. How much time will you spend running the business?
The answer to this question depends on many factors, including your personal situation, industry, and opportunities. If you are a sole proprietor who owns a bakery and makes all of the products yourself, then it could be relatively easy for you to run the business full-time.
However, if you are part of an unknown partnership or corporation with other people involved in some capacity (such as employees), then it will likely take more than just yourself working through nights and weekends (and sometimes even holidays).
Depending on how much help is needed from other members of staff—and whether they have specific skill sets that can be used by others—this may mean that some members end up spending less time at work than others do.
7. Do you own significant assets that would be at risk if your business failed?
If you have significant assets that would be at risk if your business failed, you might want to consider a C corporation.
If, however, you have no assets and all of your personal funds are tied up in the business, an LLC may be a better option.
Lastly, if there is any doubt about whether or not it’s possible for your company’s assets to be converted into cash quickly enough so that they cannot be sold by creditors in the event of bankruptcy or liquidation (and thus put other employees’ jobs at risk), then an S corporation might be best for avoiding this risk altogether.
8. If your business failed, would you owe a significant amount of money to creditors?
If you own significant assets, they may be at risk. If you have a lot of debt and creditors are owed a lot of money, there would be no risk to creditors in the event of your failure. However, if you have no assets and no debt, there would be no risk for creditors either.
You should also consider dissolution when choosing a business structure. Some business structures dissolve as soon as the owner dies or leaves. Other businesses are able to continue operations even if the owner is no longer there.
In a sole proprietorship, the owner has the right to sell the business at any point in time. For a partnership, you need to get the approval of the other individuals involved in the business.
9. Do you need to raise a large amount of capital from investors or lenders?
If you need to raise a large amount of capital from investors or lenders, then an LLC or corporation may be your best option. If not, then a sole proprietorship or partnership may be your best option.
10. What will your tax liability look like?
You will want to consider the tax implications when choosing a business structure. For example, if you are considering incorporating your business as a C-Corporation, that means that any profits made will be passed through and taxed at individual rates instead of corporate rates.
Similarly, limited liability companies (LLCs) pass through their income at lower rates than corporations.
However, these are not the same thing; one doesn’t necessarily imply the other! While it may seem logical that incorporating would lower your tax liabilities because some income is being passed on and taxed at an individual level instead of a corporate level—this isn’t necessarily true!
What matters most for determining whether or not incorporation makes sense for your business is how much money will be raised from investors in order to get started up with the capital needed.
Also, how much profit exists after expenses have been paid out before taxes are applied during each year’s operation cycle so long as those two elements remain constant throughout time periods spanning several years’ worth of months/years respectively.
When choosing a business structure that is best for your company, it’s important to consider all of your options. There are many different types of businesses and not all will work for every company.
While it may be tempting to just go with the first thing that comes to mind or what seems like the best option at first glance, it’s important to take time and research different options before making any decisions about how you want your business structured.