Choosing the Right Business Structure for your Small Business
To structure your business might sound like a tedious task. The truth is that it isn’t the most exciting part of planning a business. However, you need to consider what structure is right for you. This will have implications on your taxes, profits, even personal property. Here is how you can decide which business structure is right for you.
What Are Your Structure Options?
As far as structures are concerned, there are a few variations within the structures listed. However, here are the five most common models that you’re sure to see:
- Sole proprietorship
- Limited Liability Company
- C Corporation
- S Corporation
While there is plenty that you could learn about each type, it’s important to ask yourself a few questions while you figure out which one would suit you the most.
How Well Do You Tolerate Personal Asset Risk?
Businesses are always at risk for lawsuit. In a sole proprietorship, your personal assets are targets if you lose a lawsuit. LLCs and corporations, on the other hand have protected assets.
How Do You Want the IRS to Tax Your Profit?
In sole proprietorships and S corporations, profits pass to the owners of the business and must be reported on the owner’s individual returns. C corporations, on the other hand, are separate entities from the owners.
How Formal Is Your Management Structure?
If you have multiple owners, then it might be more complicated to structure your business. Partnerships are governed by agreements that specify how the business profits and other matters are divided. In the case of S and C corporations, you have to have a board of directors. An LLC gives you a choice between being overseen by a management team.
How Much Administrative Complexity Do You Want?
If you have a noncorporation, then your paperwork and fees will be less complex. This makes it a lot easier for business owners to handle their affairs with less expertise. As you venture into S and C corporations, the complexity increases.
What Are Your Long Term Goals?
While the structure depends on your business currently, it also depends on where you want to be in the future. If you’re looking to grow your business quickly then you want to look at C corporations. These corporations allow for multiple cases of stock. They are the best if you want to seek investments from venture capitalists or if you are interested in public trading.
When it comes to deciding which business structure works for you, you need to look at your model and the future that you want for the company. If necessary, you can always find professional advice. Every business has different goals and a different structure.