How to Pick the Right Business Structure for Your New Company

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Your business structure determines its legal rights, taxes, and the licensing required. As you start your business, you may not need a complicated business format for your company, but you can always change your business legal structure as your company grows.

Business Structure Options

In the U.S., when you need to pick the right business structure for your company means having four primary ones to choose from, each with its advantages and disadvantages.

1.      Sole Proprietorship

Any business not registering another legal structure is considered a sole proprietorship. When you start a business as a sole proprietorship, you don’t file paperwork to form the company officially unless you use a DBA (doing business as). With a DBA, you file a form and pay a small fee.

As the fastest, easiest and cheapest option, it’s no wonder that many small businesses in the U.S. opt for this business structure. One disadvantage of being a sole proprietorship remains the difficulty in finding bank loans and the inability to sell stocks.

2.      General Partnership

Often businesses with more than one owner prefer to create a partnership. The company is unincorporated, and the owners declare their profits onto their income tax after dividing them.

3.      Limited Liability Company (LLC)

The more formal business structure offered by LLCs has become popular since it allows multiple partners and limits personal liability. In addition, LLCs don’t have overly complicated paperwork and can find investors easily because they are considered more credible.

Owners of LLCs are called members and can opt to pay taxes as a member or at a corporate level.

4.      Corporations

C corporations and S corporations are the two types of corporations. When forming, the default is a C Corporation. However, a C Corp can file Form 2553 with the IRS to avoid the double taxation of a C Corp by letting them pass through to the owner.

However, there are limits as to which companies can choose S Corporation status. These include a limited number of 100 shareholders who must have U.S. citizenship and cannot be another profit-making business.

Picking the Right Business Structure

Several issues, particularly your long-term business strategy, will help you determine your entity’s needs when considering the proper business structure. Changes are possible, but they can cost you time and money, so consider the following when deciding:

Long-Term Plans

If you intend to continue running your business alone, you may not need anything more complicated than a sole proprietorship. However, if you plan to build a large company and bring in more investors, you should consider a C Corporation, which has no restrictions on the number of shareholders you can have. Other options for multiple owners include a general partnership, LLC, or S Corporation.

Another advantage of corporations is that the entity continues to exist when one partner retires or dies. Generally, the other business structures will dissolve unless the outcomes are specified beforehand in the business Operating Agreement.

Consider Risks to Personal Assets

Business owners face several risks. Two of the most serious are lawsuits and bankruptcies. If you don’t have the protection of a legal structure, then you place your personal assets at risk. Therefore, in a sole proprietorship or general partnership, you and your partners can face losing your assets to pay off debts or damages.

Establishing an LLC or Corporation offers asset protection for all members.

Business Profits and Taxes

Owners of sole proprietorships, partnerships and S corporations pay pass-through taxation. Therefore, the profits pass through the entity directly to the owners, who pay taxes on their returns.

LLCs have default pass-through taxation, but their owners can also opt to pay tax as a corporation.

C corporation shareholders separate their entities from themselves. As a result, they pay taxes on their profits at the corporate level, and when they get their dividends from the after-tax income, they pay taxes on their tax returns.

Management Structure

Depending on the number of owners, business structures may need to differ.

In a partnership, an agreement between parties must stipulate the dividing of profits. The partners must also agree on how it will continue should a partner decide to retire or passes away. They also need to know what happens in case of bankruptcy.

S Corporations are legally required to have a board of directors. Their task is to supervise the company on behalf of the shareholders.

LLC members can choose whether the company is a member – or manager-managed entity. The Operating Agreement is the document in which the members specify the LLCs rules.

Administrative Complexities

Sole proprietorships and partnerships are informal structures requiring less paperwork and fees at their inception. As a result, they have few ongoing legal and accounting requirements.

S and C corporations have increased administrative demands, and these companies need legal and accounting services to ensure they meet deadlines and remain compliant.

LLCs have the least requirements of the formal legal business structures but must remain compliant.

Picking the Right Business Structure

The best business structure for your company depends on your long-term plans, the degree of risk you’re willing to take on, and how much paperwork and accounting you want to deal with. Consider all these factors when making your decision. And if you’re unsure, seek professional help to ensure you make the best choice for your business.

This article is intended to provide general information and should not be used as a substitute for professional legal or financial advice. Please consult an attorney or financial advisor before deciding on your business structure.

FAQ

What is the best business structure for my company?

It depends on your long-term plans, the risk you’re willing to take, and how much paperwork and accounting you want to deal with. Consider all these factors when making your decision. And if you’re unsure, seek professional help to ensure you make the best choice for your business.

What are the advantages of a corporation?

One advantage of a corporation is that it offers shareholders limited liability protection. That means that shareholders are not personally responsible for the debts and liabilities of the corporation. Another advantage of corporations is that they can raise capital by selling shares of stock. And finally, corporations have a perpetual life, meaning they exist indefinitely, even if shareholders come and go.

What are the disadvantages of a corporation?

One disadvantage of a corporation is that it can be more expensive to set up and maintain than other business structures. For example, corporations must hold annual meetings of shareholders and keep detailed corporate minutes. They also must file annual reports with the state. And finally, corporations are subject to double taxation, meaning that they pay taxes on their profits at the corporate level and then again at the shareholder level when dividends are distributed.

What is an LLC?

An LLC is a hybrid business structure that offers the limited liability protection of a corporation with the tax benefits of a sole proprietorship or partnership. LLCs are relatively easy to set up and maintain, and they can be structured in various ways to meet the needs of the business.

What is the best business structure for a small business?

The best business structure for a small business depends on the company’s goals, the degree of risk the owners are willing to take on, and how much paperwork and accounting they want to deal with. In general, sole proprietorships and partnerships are less expensive and easier to set up than corporations. And LLCs offer the benefits of both sole proprietorships and corporations. So if you’re unsure which structure is right for your small business, seek professional help to make sure you choose the best option.

What is the best business structure for a startup?

The best business structure for a startup depends on the long-term plans for the company, the degree of risk the founders are willing to take on, and how much paperwork and accounting they want to deal with. In general, sole proprietorships and partnerships are less expensive and easier to set up than corporations. And LLCs offer the benefits of both sole proprietorships and corporations. So if you’re unsure which structure is suitable for your startup, seek professional help to make sure you choose the best option.

What is the best business structure for a new business?

The best business structure for a new business depends on the long-term plans for the company, the degree of risk the owners are willing to take on, and how much paperwork and accounting they want to deal with. In general, sole proprietorships and partnerships are less expensive and easier to set up than corporations. And LLCs offer the benefits of both sole proprietorships and corporations. So if you’re unsure which structure is right for your new business, seek professional help to make sure you choose the best option.

What is the best business structure for an online business?

The best business structure for an online business depends on the long-term plans for the company, the degree of risk the owners are willing to take on, and how much paperwork and accounting they want to deal with. In general, sole proprietorships and partnerships are less expensive and easier to set up than corporations. And LLCs offer the benefits of both sole proprietorships and corporations. So if you’re unsure which structure is right for your online business, seek professional help to make sure you choose the best option.

What is the best business structure for a small business?

The best business structure for a small business depends on the company’s goals, the degree of risk the owners are willing to take, and how much paperwork and accounting they want to deal with. In general, sole proprietorships and partnerships are less expensive and easier to set up than corporations. And LLCs offer the benefits of both sole proprietorships and corporations. So if you’re unsure which structure is right for your small business, seek professional help to make sure you choose the best option.

What is the best business structure for a startup?

The best business structure for a startup depends on the long-term plans for the company, the degree of risk the founders are willing to take on, and how much paperwork and accounting they want to deal with. In general, sole proprietorships and partnerships are less expensive and easier to set up than corporations. And LLCs offer the benefits of both sole proprietorships and corporations. So if you’re unsure which structure is right for your startup, seek professional help to make sure you choose the best option.

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