How to Choose a Business Structure
What are you willing to risk for your company? Most business organizations carry minimal personal risk to their founders, but that equation may be very different for you if you’re a small company.
Choosing a business structure determines the level of risk you carry as you do business daily. What business structure makes sense for your company? Take a look.
A sole proprietorship is one of the easiest business structures to form, and it’s excellent for solopreneurs. You’re a sole proprietorship if you perform business activities, but you don’t register as a kind of business. You can still get a tradename, but you can’t sell stock in your company.
Lastly, all of your business assets and liabilities are tied up with your personal assets and liabilities. As a result, there’s a risk. You could be held liable from an individual standpoint for the debts of your company.
That makes this a reasonably tough structure to consider if you need to raise capital to get your business off the ground or help it grow. You’ll only want to consider this option if you have a low-risk business or if you’re just trying to test out an idea.
Like a sole proprietorship, this is a straightforward business structure. A partnership is designed for just a few people who own a business as a group.
You can either create a limited partnership or a limited liability partnership. Typically, limited partnerships have a general partner with unlimited liability.
All of the others involved have limited liability, which means they don’t have as much control over the company.
The profits go through personal tax returns, and the partners must pay self-employment taxes. Limited liability partnerships offer limited liability to every owner.
No one is responsible for the debts or actions of other partners or the partnership itself. This business structure is ideal if you have multiple partners involved in one business.
Limited Liability Company
Often known as an LLC, this option helps to protect you from personal liability. It protects your personal assets, and profits and losses aren’t subject to corporate taxes.
LLC members, though, have to pay self-employment taxes. LLCs tend to be a good choice if you have a business with some risk, but you want a lower tax rate than you might be subject to as a corporation.
There are five different kinds of corporations, and they tend to protect their owners better than any other kind of business structure. That level of protection, though, comes at an added cost, and you’ll need to do quite a bit of record-keeping if you plan to use this business structure.
Corporate profits are usually taxed twice. The company itself is taxed, but so are the dividends on personal tax returns.
A C-corp is one option here, and it’s ideal if you’re looking to raise capital or attract employees. You can also form an S-corp if you want to avoid double taxation.
In situations like this, you can pass some profits and losses to your personal income. You cannot, though, have more than 100 shareholders and there are strict filing processes.
A B-corp is another option, which is taxed like a C-corp. B-corps have to have some kind of public benefit in addition to a solid profit. It’s also possible to form a close corp or a nonprofit corp.
Businesses that are operated by those using its services can form a cooperative. The profits and earnings here are distributed among those who own it, and you must have an elected board of directors and officers to run it.
Members purchase shares, but holding more shares doesn’t mean holding additional voting power. Cooperatives have better taxation options – the members aren’t taxed on their income – and they may be able to access some grant money to get started. The problem with this business structure, though, is that it’s reasonably complex to form.
Before You Decide
You can form one of the business structures or combine them to meet your needs better. Before you decide what might be right for you, though, you’ll want to consider several factors. Think about your five-year plan. Will the structure you’re considering grow with you?
Think also about how much personal liability you’ll want to carry and how you prefer to deal with taxes. Finally, consider how much control you’ll want now and in the future over your business.
If you want sole control, that will affect the structure you choose. If you’d prefer to have a board in the driver’s seat, that, too, could change things for you.
If you’re not willing to risk it all for your company, you must select a business structure to meet your needs. Be sure to consult with an attorney and your accountant before choosing a business structure that allows you to move forward.