Choosing a Business Structure
One of your first major decisions as a small business owner will be to decide on an organizational structure for your business. Your decision will determine everything from management to business taxes and legal liability. But what business structure is right for you? Here, we outline the basics of business structure to help you make your important decision.
What Is a Business Structure?
Also called a business entity, a business structure is a titled organizational system that will pave the way for all aspects of your business’s operations. Depending on which structure you choose, the government, legal system, and potential financial supporters will see your business differently. Your choice affects:
- The Predicted Success of Your Business Plan
- How Your Business Will Grow, Profit, and Disband
- How Successfully Your Business Will Obtain Funding
- How Your Financial Obligations Will Be Met
- Who Has Influence in Your Business Operations
- Who Is Legally Accountable in Case of Lawsuits
- Who Can Access Business Cash for Personal Needs
What Business Structure Options Exist?
- Sole Proprietorship. A sole proprietorship is the simplest, easiest, and least expensive structure for a small starting business. You are the only owner, so you have full control of business and are the recipient of all profits. However, you will file business taxes with your personal taxes, and you have personal liability—meaning your assets can be seized in case of legal trouble.
- Partnership. In a partnership, you and at least one other person share business responsibilities, so it’s important to invest enough time in outlining a legal agreement with him or her. You may have an easier time raising funds and attracting employees with a partner—but the government still sees you both as personally liable for legal matters. Common types of partnerships are general partnerships, limited partnerships, and joint ventures.
- Corporation. A corporation exists as an entirely separate entity from its owners—its business deals, legal issues, and taxes are all its own. Your personal assets are safe; however, a corporation is more complex, pays higher taxes, and requires more funding than a structure that holds you personally liable. You also must share control with a board of directors and accept incorporated regulation from government agencies. Common corporation types are C and S corporations, professional corporations, and nonprofit corporations.
- Limited Liability Company (LLC). An LLC has a hybrid structure with the limited liability of a corporation and lower taxes similar to a partnership. The company owners determine the lifetime of the LLC when they establish the business, and at the time that the company is scheduled to dissolve, they can vote to renew their license. LLCs are much more formal in their startup procedures than other structures. They require a larger initial investment and must have no more than two of the four recognized characteristics of a corporation to avoid incurring corporation taxes.
Take your time to learn everything you can about small business structures. When you’re ready, it’s a good idea to have your lawyer, CPA, or other business advisor help you weigh the benefits of each available title. Choose wisely—a business structure could be a tremendous help or hindrance to your goals, both legally and financially.
