Choosing a Right Business Structure – Ultimate Guide
So, you have made up your mind that you want to enter into your own business and become the next big business person in the world. Well, that is great news. But before you walk into this new phase of your life, there are a lot of things that you would need to understand and consider about your business. And the very first thing is choosing a business structure that is right for your plan
Choosing a business structure is important since it would allow you to plan out how things would work in the company. Moreover, if you are starting a business in the USA, there are four major kinds of business structures that you can choose from:
- Sole proprietorships
- Limited liability company (LLC)
Each have their own different costs, drawbacks, benefits, and requirements. To help you know what you need to check when choosing a business structure, we have gather some points and shared in this post.
Factors to Consider while Selecting a Legal Structure
As mentioned above, choosing a business structure for your company is a very important part of being a business owner and taking a step towards building an empire. The choice you make would have a huge impact on many key parts of your company that includes the legal liability, control over the business, and the tax payments.
To help you better, here are the factors that should be considered when you are choosing a business structure for your company:
One of the main factors that an entrepreneur must consider while choosing a business structure is the amount of control that the entrepreneur would have over the business with the business structure they chose. For instance, in case you wish to operate and own your company all by yourself, that is when you should choose to be a sole proprietor. It would be the best choice for you. Basically, choosing a business structure would affect which aspects of the company you would be able to control and what parts you would legally own.
2. Liability Limitations
The limitation on the liability in every business structure is different. So, choosing a business structure would also affect your legal liability. This is one of the most important things that you would need to consider the extent to which you want to be protected from any personal legal liability.
In fact, a few business structures offer this huge benefit and being able to enjoy this benefit is a great thing. To be clear, the protection of your legal liability means that all your personal assets would not be used in case your company falls under debt or sued. But you need to know that all the business structures do not offer this benefit, which is why you need to choose the one that you find would give you best as per your desires.
3. Complexity & Cost of formation and Legal Structure
Each of the business structure has its own ways of setting up. This means that they have different complexities, costs, and procedures to set up. For instance, a sole proprietorship is very simple to set up and also has a few reporting requirements. But if you choose to open a Corporation, then you would have to undergo a lot of complexities.
4. Tax Implication
Another thing that you would have to consider while choosing a business structure is the tax implications. Yes, the business structure you choose would affect the amount of tax, kinds of tax and how you would be pay taxes.
And if you decide to open a Corporation, you might have to deal with double taxation where you would have to pay corporate tax on the profits of your company and also personal income tax on what you earn from the company. Which means that you would pay double tax on the profits of your company (which is also your earning), unless and until you are putting all the amount back in the company.
5. Continuity of Existence
It is very important for you to see how long your business can stand and exist. In case you want your business to end when you expire, then you should move ahead and start a sole proprietorship. Nevertheless, in case you want your company to exist forever until it is liquidated manually, then you would have to pick up a business structure like a Corporation.
With this understood, let us understand the four main kinds of business structures in the USA that you choose from.
Types of business entities
From the above, you might have understood that the legal structure is the one that shapes your business. This is also the reason why it is important to choose the one that would best suit you. To help you learn more about the kinds of business structures that are there, we have outlined each for you below:
A Sole Proprietorship is one of the simplest forms that falls under the kinds of business structures. Under this business structure, only one person is responsible for all the profits and losses of the company – and that is you, the sole owner. So, in case you want to be your own boss and run your own business even if it is from home, then this is the best choice for you.
Just remember while choosing this business structure, you would not have any protection against your personal assets. Also, there wouldn’t be any separation of the professional and personal assets, and this would cause you a lot of issues in the future as you grow your business. Mostly, if you want to expand your business, then this structure would hinder your way and cause complications.
A partnership is owned by two or more individuals and there are two kinds under this type of business structure. One is a general partnership where everything is shared equally amongst the partners and the same rules of the Sole Proprietorship apply here as well. On the other hand is the limited partnership, where only one partner has the control of the company and the other people are just contributors.
In the Limited partnership, the personal assets of the owners are protected while in the general partnership the personal assets are not protected. Furthermore, one of the two types are selected based on the funding of the entity and the liability structure. In fact, this kind of entity structure is the best for those who want to work with their family members.
A partnership allows the partners to share profits and losses and make decisions together within the business structure. Remember that you will be held liable for the decisions made, as well as those actions made by your business partner.
Limited Liability Company (LLC)
One of the most famous types of business structure that many tend to choose while forming a company is the LLC. The Limited Liability Company is a hybrid structure that permits the owners, shareholders, and partners of the company to limit their personal liabilities while they easily enjoy the flexibility and tax benefits of the partnership.
Basically, the limited liability company provides a lot more separation and protections to the business as compared to the sole proprietorship. Moreover, the LLC is more of a the combination of a corporation and partnership. This means that your business and personal assets are separated plus your profits and losses are not taxed at the corporate level.
As per the law, a corporation is a business entity that is separate from the owners of the corporation. In short, it has its own legal rights and is completely independent of its members. This means that the corporation can sue some other person, be sued, sell property, own property and even sell off the ownership rights to people in the form of stocks. There are many kinds of corporations which includes the S corporation, C corporation, closed corporation, non-profit corporations, and B corporations. Before you begin choosing a business structure, let us see what these types are:
- Nonprofit Corporation – It is used to help others in some way or the other. This business entity is exempt from taxes.
- Closed Corporation – These businesses are normally operated by a few shareholders, benefit from the limited liability protection, and are not publicly traded companies.
- B Corporation – Known as the benefit corporations, these are for-profit entities that are created to make a positive impact on the society as they earn profit for it.
- S Corporation – This corporation type is selected mostly to avoid the double taxation issues that come up with the C corporation (mentioned in next point). Plus it also offers the limited liability protection to owners just like the LLCs.
- C Corporation – This is a business that is owned by the shareholders. But the C Corporation is taxed as a separate entity while the owners are able to enjoy the limited liability protection. The only drawback in this business structure is that it suffers from double taxation where the profits of the company are taxed at the corporate level and the profits given to the shareholders are again taxed at the personal level.
How can IncParadise help?
Now that you know all about the various business structures and how to select the right one for your company, it is time for you to choose it. As you begin choosing a business structure, ensure that it gives you the most benefits possible based on how your company would run. Also, if you are looking for some help to have your company incorporated and registered in any state in the USA, IncParadise can help you. Contact us to know more about it!
Like what you're reading? Get fresh tips to start & grow your company.