Deciding on what business structure fits your startup is a make or break moment for entrepreneurs. The business entity you select today can dictate your trajectory and consequently, your company’s overall future. Business structures can impact litigation issues, financial growth, and operational systems. But, when you consider the following critical factors, you should lay a solid framework for your start-up.
- Business taxes
Business owners are required by law to meet their federal and local tax obligations to avoid legal actions. The kind of business structure you operate can directly affect your personal liability and tax obligations. For example, if you choose a sole proprietorship, that’s an easy way to launch your small start-up. Sole proprietorships are less regulated by governments, and so are their tax obligations.
You and your start-up are considered as one legal entity, meaning that the founder is solely responsible for all business losses and liabilities. On the other hand, if you choose a limited availability company (LLC), you can separate your personal assets from the business. Since different states have different business laws, it’s better to seek help from experts when launching your business. For instance, California entrepreneurs may want to consult tax professionals to help weigh the differences between California LLC vs. S Corp (Subchapter S Corporations).
- Industry and liabilities
Your company’s structure should relate well with the industry you are venturing into, such that you can minimize risks and conform to everyday business practices and federal requirements. For instance, real estate is seen as a high-risk investment. But with LLC structures, business owners can get liability protection. If your business intends to offer professional services, you may consider forming a partnership. It’s easier to manage partnerships as they guarantee flexibility. Based on the kind of collaboration, the liability could either be limited or unlimited.
- Expansion
It’s the dream of every entrepreneur to grow their business to the highest level of success. However, the reality is that some business structures can curtail your growth by placing limitations on the number of shareholders the business can have. If you are a budding entrepreneur with an eye for development, make a smart decision and choose a business structure that will allow you to expand your company. In a sole proprietorship, your business may cease to exist with a sole proprietorship if new partners are not interested in expansion. The bottom line is that climbing greater heights will likely become an impossibility if you choose the wrong business structure.
- Costs and business information
Forming a corporation is not only expensive; it’s also time-consuming and complicated. A sole proprietorship is one of the cheapest business structures you can establish; after all, you won’t have to hire attorneys to draft detailed legal documents for the business. As you weigh options for an affordable business structure, you also need to decide whether you will want third-parties to access your business’ finances. Corporations must provide governments with details of their finances and operations. Conversely, sole proprietors, and partnership businesses enjoy a higher level of privacy.
