Business Structure: Which is Best for My Business?
When you first start a new business, you have a lot of important decisions to make. The amount of administrative work involved in starting a new company can sometimes be a deterrent. But you should consider the initial time investment a great way to make sure that your business is profitable in the future. This guide will provide you with all the information you need to know about business structuring!
Things to Consider
There are a few different factors to consider when deciding which business structure you want to work with. The factors that are most important to you will be the ones that you choose to value. Have a look at the different factors below:
As a business owner, you have to decide how much complexity you’re willing to take on. Some of the business structures with the most benefits also have the most complexity. If this is a side-business, you may not be willing to take on the administrative work that is involved in owning a complex business.
Another important factor to consider is how much personal risk you’re willing to expose yourself to. There are a variety of business structures that allow you to separate personal and business related risk. This is a good option for those who work in industries that may result in litigation. You don’t want to put your family’s livelihood at risk because of your business dealings. Assess the risk you’re exposed to in your new business.
Taxation is one of the biggest factors that new business owners need to consider when they’re trying to start a company. You want to ensure that your business is structured in a way that provides you the most tax benefit possible. You should consider the level of income that you’ll be receiving, as well as the tax schedule you would like to work with. If you have an accountant, this may be an issue that you’d like to discuss with them prior to making any structuring decisions!
Another vital factor in determining the best business structure is the type of ownership involved in your business. If you own the business by yourself, your priorities will be different than if there are several partners in the business. The number of shareholders your business has will largely determine the structuring options available to you. Make sure your business ownership is clear before you decide on a structure to work with.
If you’re planning on developing your business further in the future, you need to consider your future plans when you’re trying to determine which structure to use. Restructuring a business can be extremely problematic, sometimes it can even be impossible – this is why it’s important to consider your future ambitions.
Different Business Structures and Their Benefits
Each business structure has a unique set of benefits. If you want to make sure that you get the most out of your business, it’s important to choose the structure that is most suited to your business type. Not all businesses are alike – it’s important to recognize the vast difference in benefits that you receive from each structure. The major business structures and their associated benefits are outlined below.
The most basic business structure is a sole proprietorship. You won’t have to incorporate your business to use this business structure. You can only use this type of ownership if you’re the only shareholder in your business. This type of structure does open your personal assets up to risk.
- Easy tax structure (income tax brackets)
- Minimal set up cost
LLCs, or Limited Liability Companies, are typically the most common form of business structuring. They allow for multiple owners, and they limit the personal liability that you have for activities your business does. This allows income to be taxed at either a corporate level or at an owner/member level. Setting up an LLC is slightly more complex than a sole proprietorship.
- Less liability
- Flexible taxation
- Multiple owners
A partnership is another form of business that can have multiple owners. It also allows you to reduce your personal risk if you set it up correctly. The profits of a partnership are divided between the owners of the partnership – the share is dependent on equity. There are many legal and financial businesses that use this type of business structure.
- Good for multiple owners
- Taxation on income
- Can reduce liability more than with sole proprietorship
A C Corporation can have as many shareholders as needed. Tax is taken from profit, as well as the income of shareholders and employees. You can have several different classes of stock if you set up a C Corporation.
- Unlimited shareholders
- Different classes of stock
- Limited liability
- Large companies
With a S Corporation, shareholders have limited liability. There can only be 100 shareholders with a S Corporation structuring – it’s not suitable for extremely large businesses. Income taxed on the income of shareholders.
- Up to 100 shareholders
- Limited liability
- Income taxed on shareholder tax returns
As you can see, there is quite a high level of variation between the different types of business structures. As mentioned previously, it can often take considerable time and money to alter a business structure after it has already been put in place. For this reason, you should be aiming to set your business up with the future in mind.
The way your business is structured does not only influence the way that you’re paid, it also impacts the type of funding you will have access to. Lenders will take your business structure into consideration when making lending decisions. You’ll want to make sure you have it designed to appeal to lenders.
If you have any other questions about how to start a business, or how to receive funding, make sure to check out some of the other information we have posted on our site. We have a great deal of resources that are intended to help our readers become better business owners!
Michelle worked at a teller at her local bank while she was earning her degree in economics. Then, after completing an MBA, she came back to the bank as a loan officer. As a result, Michelle is uniquely suited to providing advice to small businesses when it comes to selecting the best loan and credit products.