Setting up a profitable business is something every business-minded person dreams of. The problem begins when it comes to choosing which business entity structure to establish. The selection you make will determine the type of income tax returns you will end up filing. That is why you must make the appropriate choice. This will ensure your business operates smoothly throughout.
Business entity structures
A sole proprietorship is a structure where a single individual owns the business. This means that you get to enjoy all the profit and suffer the losses whenever they occur. It is usually easy to start, run, and manage. You will also find it to be very flexible than other business structures. Despite all those remarkable advantages, a sole proprietorship is an unlimited liability. This means that in case of bankruptcy, the business assets will be sold to pay off the loans.
A corporation is a
business structure entity that is owned and controlled by a group of shareholders who come up with an elected list of board of directors. It is thus the work of the directors to manage the business daily. They make all the decisions as well as decide whom to hire or fire. They have to ensure the business’s targets are met within the specified period. Keep in mind that a corporation operates as a separate legal entity from the shareholders. The company itself can buy assets, sue, and get sued. The owners, on the other hand, have limited liability.
To understand better what an S Corp is, you need to look at it on the angle of taxation. It is the type of corporation which elects to pass losses, income, credits, and deductions to shareholders. This is solely due to tax purposes. An S Corp has one taxation layer. This is because for tax purposes, the income earned is shared among shareholders. The owners also get to receive a step-up of income depending on their stock every financial year.
This is a business structure that is formed by two or more people. Each partner contributes to the capital of the business. They also make decisions on the day to day running of the company. Depending on every partner’s expertise, the individuals may decide to take on different tasks for the efficiency of the business. It is a type of
business structure entity that requires less capital to start.
Limited Liability Partnership (LLP)
Business owners require to apply through the secretary of state for them to become a limited liability partnership. This is where the people have limited liability, just like the name suggests. This means that each partner gets to suffer the consequences as an individual in case of wrongdoing. You will, however, require to spend more during its formation compared to a general partnership.
Factors to consider before choosing your business structure
Now that you are aware of the different types of business structures available, it is time to have a look at what you need to consider before choosing a business structure. The list of considerations below will enable you to make the right choice and come up with an ideal business structure that suits you.
The ease of establishment
You need to consider how easy it is to establish a business structure. If you want something that will take a shorter period, then consider sole proprietorship. This is because it requires fewer documents, and the process is more straightforward. However, if you don’t mind about the ease of establishment, then you can go ahead and select any of the business structures mentioned above.
The termination of the business
There are different ways that a business can get terminated. If you wish the business to continue operating even after you are gone, you can go for partnership, corporation or S corporation business structure. This is because if you go for a sole proprietorship, your business will be halted as soon as you are gone or even divorce.
How much you are willing to spend for the setup
The setup cost is different from one business structure to another. You will tend to spend lesser amounts when setting up a sole proprietorship than when establishing other forms of businesses. Limited liability partnership is so far among the most expensive business structures. You will also need to have an attorney when setting up those other businesses structures but not the sole proprietorship.
A sole proprietorship business structure is the best choice for anyone who wants to make all the business decisions without facing any opposition whatsoever. With the other business structures such as corporations and partnerships, the only way to make decisions is if you are part of the executive board. Otherwise, you will not have any abilities when it comes to decision-making capabilities.
The ease in raising capital
For a sole proprietorship, you will need to take a loan for you to come up with the money required to set up the business. This means that you will have to use your items as collateral. Other business structures such as limited liability partnership, corporations, and S Corporations tend to have an easy way of coming up with the capital. This is even though they are the hardest and more expensive to establish.
The amount of risk involved
A sole proprietor tends to take on too much risk compared to other forms of business structures. This is because you are liable in case of anything. First, if you don’t pay back your debts, your items are always on the line. One the other hand, corporates, and partnerships tend to have minimal risks when it comes to the shareholders and employees.
Before setting up a business, you must decide which type of business structure your business require. There are quite many structures to pick from, but you have to be careful with the selection you make. The above include factors to consider when selecting a business structure, pay attention to the numerous factors, and see which business structure is ideal.