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Things to Consider When Choosing a Business Structure

Things to Consider When Choosing a Business Structure

One of the first things you need to do when setting up a new business is to choose a business structure. Whether it is a home business, a new e-commerce venture, or a startup that develops a solution for customers, the right business structure can determine the future of your business venture. Yes, you can make changes to the structure of your business at a later date, but getting it right from the beginning is always the better way to go.

There are multiple business structures to choose from too, starting with the simple sole proprietorship to complex hybrid structures designed to meet specific needs of business owners and partners. Before you can choose from the different business structures available, however, you need to first understand some of the things to consider along the way.

Types of Business Entities

Before we get to the factors to consider when choosing a business structure, let us first take a look at the different types of business entities you can choose from. As mentioned earlier, sole proprietorship is often considered to be the simplest of them all. As the business owner, you are entirely responsible for the business and any financial liability associated with it.

Sole proprietorship allows you to maintain complete control of the business. You are both the business owner and the primary decision maker in the organization, so you can choose to take the business to any direction.

The next form of business entity is a partnership, which involves one or more partners aside from the primary business owner. When you have partners helping you with the business and co-owning the company, this is the business structure to go for.

Since there are partners in the business, the financial liability of the business is proportionately divided among partners. Partnerships, however, don’t require you to bear the burden of taxes on profits and operational revenues, which means individual partners will have to tax their business incomes themselves.

There is also a corporation, which is more formal and involves multiple shareholders. A corporation is seen as completely detached from individual founders, so financial liabilities and other burdens all stop at the business level. Corporations are seen as legal entities too, so your corporation can be sued or deemed liable.

The only downside to setting up a corporation is the complexity of it. Extensive recordkeeping is required by law and the corporation itself needs to be managed in a certain way. More shareholders also means there are more parties affecting corporate decisions, which makes steering the company in a certain direction more difficult.

The last form of business entity is known as a hybrid entity or an LLC. What is an LLC? Short for Limited Liability Company, an LLC gives you the best of both worlds. You get the benefits of a large corporation without the complexity that comes with those benefits. If you ask a legal expert, “what is an LLC?” you will immediately realize from the answer that it is basically a mix of corporation and partnership.

As mentioned before, you benefit from the LLC being seen as a legal entity. It eliminates financial liabilities on your end. At the same time, business profits are also treated as pass-through incomes, so you don’t pay taxes on them on a business level. Now that you know what is an LLC and what it can do, it is time to take a look at the first factor to consider when choosing a business structure, which is:

Legal Liability

LLC has been incredibly popular among business owners because of the shielding this structure provides against financial and legal liabilities. The business is seen as an entity from a legal perspective, so any lawsuit related to the business will be directed to – and handled by – the business.

At the same time, business owners in an LLC don’t need to worry about personal assets being used to settle financial liabilities of their businesses. If you are looking to minimize legal liability, but you are not ready to deal with the complexity of a corporation, an LLC is the structure for you.

Cost of Formation

Different business structures cost different amounts of money to set up. A sole proprietorship is the most affordable form to create. It is also the simplest, since you don’t have to go through complex proceedings to start a business on your own.

As you go for more complex structures, the cost of formation goes up as well. LLC is the only exception here. There are service providers that offer incorporation services at affordable prices. When you consider the lower long-term cost of setting up a company this way, it is easy to see why LLCs are so popular.

There is also the fact that each business structure is associated with long-term costs. A corporation, for instance, must maintain a meticulous financial record as required by law. Meeting the requirements will cost money.

Tax Requirements

Pass-through business structures are the best, since you don’t need to tax revenues on a business level – and then tax the income you receive from the business again as personal revenue. In this case, corporation is the only structure that doesn’t allow you to pass your business revenues through.

Once again, you can turn to LLCs if you want to enjoy the benefit of having a pass-through business entity without the extra complications. You only need to tax your income once, and even then, you have plenty of tax credits and aids to utilize.

Flexibility

Last but not least, we have flexibility. The market is changing rapidly, and there are new opportunities to seize. The last thing you want is the business structure of your venture to stop you from being incredibly flexible in the market.

Make sure you consider the ownership structure and how the business is set up before finalizing your decision on a business structure to go for. Make sure you can make immediate changes if you have to in order to maintain a degree of flexibility in the future.

With these factors considered – and the choices laid out earlier – finding the right business structure is not difficult at all. You’ll have your new business set up and ready to go in no time once a suitable structure is determined.


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by Rebecca Jones // Contributor to Businessing Magazine.

Opinions expressed by contributors are their own.