Starting a business is an exciting time, and while there are a lot of risks, the rewards are immense. However, one of new business owners’ biggest mistakes happens long before they make their first sale.
They fail to structure their business properly.
There are several ways a business can be structured, and the impact of your decision will affect every aspect of the business going forward.
Today, we’re going to talk about different business structure types and which business structure to choose depending on different factors.
Let’s dive in!
What is a Business Structure and Why Does it Matter?
A business structure is essentially an outline designed to show the government and the public, what your business is meant to do.
It creates an on-paper description of the scope of your business, the types of business activities that will take place, how much responsibility you have from a legal standpoint, etc.
You’ve likely seen the signs of a business’s structure in your day-to-day life. Companies with LLC, Ltd, and LLP in their names are all openly stating their business structure.
Why are those legal descriptions important, though? They determine your company’s legal responsibilities as well as several other aspects of your company’s operation. There are different tax requirements for different structures, legal processes, and more.
If you want to operate a business effectively and without running into financial or legal problems, you have to choose a type of business structure that aligns properly with what your business is doing.
Types of Business Structures
There are various types of business structures for you to choose from. Each one differs in various ways, and you should fully research each option before committing to anything.
Again, this is a major choice for your business, and it will impact your chance of success going forward.
1: Sole Proprietorship
This is a simple type of business structure. It’s when you’re the sole owner and operator of the business. With the internet making it far easier for people to enter the business world, and solo opportunities at an all-time high, this has become a popular option.
It’s also the fastest way to open a business if you don’t plan on partnering with anyone or becoming incorporated.
If your business is owned solely by you, this is usually the route you’ll want to take. You even get to keep all your profits without worrying about partners, investors, or any of that.
However, there are some drawbacks. When you start a sole proprietorship, you and your business are considered the same. If your business gets sued, you get sued. If your business fails to pay its taxes, you take the blame.
This means that your finances and life are connected to your business, and there aren’t any buffers to help you keep the two separate.
In comparison, some other business structure types don’t look at the ownership’s funds as part of the business. If something goes wrong with the business, everything comes out of the business’s accounts.
2: Limited Liability Partnerships
Limited Liability Partnerships are used for businesses with multiple owners. Whether this includes several business professionals joining forces to start a new venture, or if it’s a small business comprised of a few business-oriented friends, it’s a viable option.
The goal of this business structure is to ensure that each partner is liable for their own mistakes. For example, if one partner commits a crime or gets sued, it’s not the legal responsibility of the other partners to pay whatever consequences result from the mistake.
This also ensures that each partner is thoroughly involved in managing the business, and they can create their way of doing things in the departments they’re in charge of. So, there’s a higher level of flexibility with less need for complete agreement on every issue.
3: LLC (Limited Liability Company)
This is a commonly used business structure that you’ve likely come across in your daily life. Limited Liability Company is also the most complex option. It’s not a federally-governed business structure.
It’s governed at the state level. Every state can make its guidelines and requirements for an LLC, and that adds complexity to the equation when it’s time to fulfill your tax responsibilities.
However, it also offers several benefits.
First, you get to choose from multiple filing options during tax season. You can find the option that is more suitable for your current financial state and performance and file accordingly.
Then, you also get protection for each partner similar to an LLP. There are very few liabilities partners have for each other’s choices in an LLC.
Finally, you can start an LLC as a single-person company and leverage most of the benefits of a sole proprietorship.
It’s more complex, and it’s easy to make costly mistakes, but this hybrid model can be useful if you learn how to work with it.
4: Corporation
A corporation is a group of existing business entities that have decided to join forces. With a corporation, each owner is completely detached from the liabilities of the company.
The company itself is considered a legal entity, and it takes action against others and gets targeted by liabilities such as lawsuits and legal issues. A corporation can also have unlimited shareholders without the restrictions of various other business structures.
The main issue with a corporation is that it’s expensive to maintain from a legal standpoint, and the requirements for maintaining it are far more complex.
Which Business Structure Should You Choose?
Almost every business will have one or more options they can technically choose from this list, and it’s not always clear what’s best for a specific company. Future goals, the scope of the business, potential liabilities, and more are all major factors in this choice.
Before registering your business and preparing for launch, it’s best to consult with a business formation company. They can review your business plan and determine the right choice for your long-term success.
For expert guidance on choosing your business structure, reach out to Legal Crystal and start your business journey today!
