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25% of Americans thought about starting a business during the coronavirus pandemic, while 64% of them have taken action, according to LendingTree. However, for those who are still in the very beginning of their business ventures (or who are still only thinking about starting a business), making those initial first-step decisions — such as choosing the right business structure — can be daunting at best. From the multiple options worth exploring to determining which is best for you, here’s what you should know before making a decision.
Understanding the value of a business structure
Indeed.com defines a business structure as “a legal representation of the organization of a company,” that “defines who owns a company and how the business distributes its profits.” With that in mind, the type of structure that you ultimately decide on will affect a variety of factors, including your day-to-day operations, your tax rates, the amount of paperwork involved, liability risks, and the ability to raise capital funds, notes Indeed. With the different types of business structures out there including sole proprietorship, partnership, limited liability company (LLC), and corporations, choosing wisely is imperative, as Indeed goes on to mention that the need to change it, later on, can be a costly process.
Exploring your options
When looking to choose the right business structure for you and your company, understanding the basics regarding the pros and cons involved with the different options out there can help. To begin with the most common (and often deemed one of the simplest) structures out there, a sole proprietorship is simply defined as “an unincorporated business entity owned and operated by a single individual,” with Shopify further noting that the primary advantage to a sole proprietorship is its simplicity in not requiring any special filing. However, that’s not to say that sole proprietorship is the best choice for everyone, as the individual is fully liable for legal liabilities as well as debts incurred by the company.
General partnership, on the other hand, can be an ideal choice when it comes to businesses owned by more than one individual, as in this type of structure general partners are equal participants. However, in addition to creditors and lawsuit plaintiffs being able to reach the personal assets of partners, Shopify explains that “there is no legal distinction between the general partners and the partnership itself, meaning all owners are subject to unlimited liability for the company’s debts and damages,” thus highlighting some of the potential drawbacks of the structure.
Corporations vs. LLCs
When it comes to corporations, Entrepreneur.com notes that the S corporation structure tends to be more fitting to those with small businesses than a regular C corporation structure as it provides business owners with the liability protection of a corporation (in addition to tax benefits). In terms of the downsides involved, it’s noted that S corporations are subject to many of the same rules that corporations have to follow, such as holding directors’ and shareholders’ meetings, keeping minutes, and allowing shareholders to vote on major corporate decisions, according to Entrepreneur.com.
LLCs, however, allow for the protection of your personal assets in the event that the company is sued, effectively creating a barrier between the owner’s personal assets and the business itself. Major benefits of an LLC include its low maintenance, being affordable to set up, and not requiring a lot of the aspects that are involved with a corporation structure (such as having to elect a board of directors or being subject to double taxation). When it comes to taking action and forming an LLC, hiring a professional service is a great way to do so, especially for those who are new to the process. For instance, involving a Northwest Registered Agent will allow you to access resources in addition to the LLC formation service, such as annual report reminders, Registered Agent service, and the ability to keep your address off the public record.
Making the right decision
With several options to consider, Business News Daily notes that considering various factors — such as flexibility, complexity, and liability can aid in making the right decision for you. For instance, in addition to the number of people involved, considering which structure will allow for the growth that you envision for your business, whether or not you plan on procuring outside funding (as well as where liability will fall in the event of a lawsuit) can all help in determining which structure fits your business best. When ultimately ensuring that you make the right decision in regards to choosing the best business structure for you and your company, Indeed.com recommends speaking with a business counselor, accountant, or attorney before making the decision.
Starting a business is no easy feat, and the paperwork and decisions involved — such as choosing the right business structure — can only add to the stress and frustration of it all. However, by understanding and considering all of the options available and consulting with a professional, you can ensure you’re making the perfect decision for you and your company.
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