Tips for Choosing the Right Business Structure

By Naida Marin | December 16, 2021

Choosing the right business structure can significantly impact the issues in your business life. The issues that can get impacted positively are liability and the rate and manner you and your business will be taxed. The right business structure can also impact your finances and the ability of your business to grow, the number of business shareholders, and how the business is generally operated.

Taxes 

As a business owner, you should understand that the business owners need to meet all the state, federal, and local tax obligations, as this will help your business stay in good legal standing. However, your liability will get impacted depending on the type of business structure you choose and the type of taxes your business will pay.

For example, choosing a sole proprietorship can be considered the easiest for forming a small business startup despite high prices. The sole proprietorship has fewer tax obligations and government regulations than the other business structures because it gets taxed personally since you and your business are considered the same legal entity. Through this, you will be personally responsible for the business liabilities and losses.

Liability protection

Before choosing the right business structure, it’s vital to understand the liability protection each of the entity structures has to offer. For instance, the business structures like LLCs and corporations give your business liability protection. In addition, it shows how your assets like your bank account, house, and car get protected in instances where your business gets sued or when your business is in debt defaults.

An LCC, in this case, gives you the opportunity of taking advantage of the corporation and partnership your business structure benefits. When considering the best choice for medium and higher risk businesses, LLC can be the best choice because the owners that have some significant personnel assets get protected, and those that want to pay low taxes compared to corporations get protected too.  Finally, when you choose the best LLC service, your business gets a more formal structure than a sole proprietorship.

Think About How Hard It Will be to Get Started 

You may have many options for ways to fund cooperation and the ways may be expensive to start. Because of this, you may need a lot of money that will help you keep the business going, as you will need a lot of paperwork. Corporations here should abide by various rules as their owners need to jump through various hoops compared to the folks that can manage sole proprietorship and partnerships. If you want to be a small business owner, you may choose sole proprietorship because the type of entities there are a bit easy when forming because of  less funding upfront.

Complexity

The most important question you need to ask yourself is how complicated your business will need to be now and in the future. Also, do you have intentions of staying as a one-person show, or do you have plans to build a business empire and start selling ventures to investors in the coming years? The two will help you have different choices.

You don’t have to make this decision entirely alone either. You can get help with your enterprise resource planning from companies like NetSuite Gurus, who can work one on one with you.

Think About Funding

You may find an easier time raising money for a corporation compared to coming up with enough capital for launching a sole proprietorship. Few investors may consider pumping money to sole proprietorship as corporations may typically have some access to the venture capitalists and the various opportunities that come with the investment. In addition, the shares of the company stock can get sold to help a corporation raise funds.

Getting a loan when you’ve chosen sole proprietorship may be difficult because of unlimited personal liability. In addition, a bank may choose not to lend money to you when you’re a new business owner because you may default on the loan, lose the company, and experience some personal financial losses.

Number and Type of Owners

Unlike the partnership owners, when you choose sole proprietorship, you will not have to worry about sharing the earnings of your business. Also, you will be able to make decisions without considering and compromising the values of a different person unless you’re with your spouse in the sole proprietorship. Additionally, since you will be solely responsible for your business’s fate, there are extreme risks that may come with a sole proprietorship.

You may need more control over your business, and in this case, you may consider LLC. If you’re the sole owner of your business, you will need to answer to the board of directors despite having a non-profit or profitable business. If your business has shareholders, you will need to address their concerns as well.

Also, if you have plans that your business will go public eventually, then you may opt to establish your business as a C corporation from the start. However, in cases where you’re building a business with no intentions of going public, then you may prefer choosing based on the number of owners you will be anticipating in your business. For example, an S corporation and LLC can have multiple owners while a sole proprietorship has a single owner. 

Entity 

When you’re planning to establish and build business credit, it’s vital to set up an entity. It may take time to build business credit, but it’s considered a huge asset when you’re done with it, especially if you own a small business. Next, you can consider why you should forge a sole proprietorship and set up an entity out of the gate.

During the entity research process, it’s vital to do a cost-benefit analysis as it will help make financial sense for setting up the entity. When you have an entity structure like LLC, the business and the personal liabilities are considered separate, for example, corporations. Therefore, you need to file different forms of LLC tax even if you have a single member or multiple LLC members.

Conclusion

The type of business structure you choose influences everything your business undergoes, from the daily operations and the extent to which your assets are at risk. So, it’s essential to choose a business structure that gives you the right legal protection balance and benefits.

As you develop your small business venture plans, it’s advisable to start by comparing the different business structures available before deciding. The type of entity you may form may be having a significant impact on your financial success from a personal and professional standpoint.