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Selecting The Right Business Structure

Selecting The Right Business Structure

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Home Page > Business > Organizational > Selecting The Right Business Structure

Selecting The Right Business Structure

Posted: Nov 21, 2010 |Comments: 0
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Selecting the right business structure for your company is one of those critical legal decisions that a small business owner should make when creating a new company. It’s important in a number of different ways. Your business structure will determine how much paperwork your company needs to generate for legalities, how much the business will pay in taxes, and how much liability you will face personally. This choice will also affect the ability of your business to obtain sufficient funding for starting up. We’ve presented the most common business structures below for your convenience.

Different Types of Business Structures

Four primary business structures are available as options for those entrepreneurs looking to start up a business. Each of these is explained below.

Sole Proprietorship- By far the most popular type of business structure, the sole proprietorship involves the ownership of a business by one person. Since only one owner is involved, this is the simplest type of business structure to set up and the easiest to maintain. It is still necessary to apply for business permits or licenses, comply with registration rules for the location of the business, and follow regulations and laws pertaining to the business. Any liabilities, debts, and taxes are the sole responsibility of the business owner.

Limited Liability Company- The Limited Liability Company is also referred to as an LLC. This business structure incorporates several aspects of both the partnership and corporation business structures while being open to individuals as well. This is an attractive option since the owners of an LLC are shielded from any personal liability. In particular, the LLC is an attractive option for sole proprietors with high exposure to liability and it makes perfect sense for them to use this specific business structure in order to protect themselves. For example, self-employed physical therapists are at great risk for liability issues and therefore, they might want to select an LLC in order to protect their personal assets.

Partnership- A partnership is the term used to define a business that involves two or more people who are responsible for running the business. Typically, the partners reach an agreement on how the business will be run in all aspects. Not only do partners share in the profits of the business, but also, they share in any liabilities or debts that accumulate as a direct result of owning the business.

Corporation- The corporation is considered a separate legal entity in its own right. It includes privileges of its own that are separate from the privileges that the owner might have. It also has separate liability issues from its owners. This means that the owners are protected from liability issues resulting from the business. The owners are not responsible for any taxes since the corporation is solely responsible for taxes accruing in direct relation to business activity. The primary disadvantage of a corporation is that it is expensive to create and run. Therefore, detailed record keeping is essential. Only the corporation is liable for its actions.

Within the corporation business structure, two options exist. The S corporation includes one level of taxation for the business, but it includes specific limitations as to the number of stockholders as well as the type of stockholders that can exist. The traditional C corporation involves double taxation, but it also includes a more flexible tax planning approach as well as the ability to shield its stockholders from tax liability.

Understanding the differences among the various types of business structures is the first step in creating a successful business. The next step requires proper planning and preparation to ensure a firm foundation for the business including the selection of the proper type of business structure. As the business grows, it might be necessary to revisit the chosen structure and select another. In particular, a small business owner has the potential to move or transfer from a sole proprietorship to a partnership or an LLC quite easily.

Important Aspects for Choosing the Best Business Structure for Your Needs

In order to make the right selection when choosing your business structure, it also helps to understand the following five terms.

Legal Liability- The legal liability facing a business suggests the need to incorporate it or form an LLC in order to protect the owner. Protection of personal assets is essential in the event that a judgment is issued against your company due to a lawsuit. However, the nature of the business must be taken into account since it might preclude the need to incorporate the business or form an LLC due to a low risk of liability.  Additionally, if you can afford the potential liability risk, then the need to incorporate the business or form an LLC diminishes. This is primarily due to the fact that potential liabilities can often be covered by insurance.

Tax Implications- The tax implications vary depending on the type of business structure that is set up. In fact, corporations have a greater number of tax options over partnerships or proprietorships. For example, owners of a corporation do not have to pay any personal income taxes on any profits that they do not get. Plus, they have a lower federal corporate income tax rate on the initial ,000 of income received by the corporation. On the other hand, unincorporated businesses have a higher federal individual income tax rate on the same initial ,000 of income. Moreover, the owners of an unincorporated business will also be required to pay income taxes on all of the net business profits.

Expenses- The expenses attached to starting up a business vary a great deal and depending on the type of business structure that you select, special fees might also apply. Setting up an LLC or a corporation involves filing fees for documents; they are more expensive to run since documentation and proper records must be maintained, special rules must be followed, and officers must be elected to run the business company.

Individual Needs- The

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