With nearly three-quarters of all businesses operating as sole proprietorships, this business structure is by far the most popular of all structures. In fact, many businesses that are now partnerships and corporations started as sole proprietorships and changed when it became advantageous to do so. It`s important to understand each legal structure so you can choose the one that best fits your business goals and what is most beneficial to you as a business owner. Three key themes distinguish the different types of business structures. Understanding these fundamental questions first can help you understand the pros and cons of each type of structure. Next, you need to assess your personal situation according to the types of structures. How much tax am I willing to pay? How much responsibility am I willing to assume? Would the administrative costs become too much for me? These questions must be answered together, because there is no perfect structure for everyone. A corporation is a separate legal entity organized in accordance with state and federal laws. The property is divided into shares. Business activity is governed by a charter that defines the powers and limits of each company. Companies that operate in more than one state must comply with federal interstate trade laws and state laws, which can vary widely.
Before deciding on your structure, seek advice from an accountant or lawyer with specialized knowledge in the field. There are many federal, state, municipal, and local laws you need to be aware of, depending on the location and type of business you operate. Some of these laws may require special tenders or permits before businesses can be opened. A lawyer or accountant can help you sift through the last level of detail before starting your business. As a small business owner, you need to play many roles to keep the business running smoothly and properly. However, there are times when you shouldn`t try to be a lawyer, accountant, marketer, foreman, salesperson, etc. Instead, take advantage of the professional advice that is so readily available. A good lawyer, or CPA, can help you interpret the many legal and technical issues related to one or all of the legal structures of businesses. Your time and money savings for hiring a professional advisor can more than offset the potential cost of missteps and misturns when choosing your company`s business structure. Since laws are constantly changing, it`s best to consult a lawyer or accountant for the latest regulations and requirements before deciding on the right business structure for you. Incorporation: Corporations are more complex entities to create, have more legal and accounting requirements, and are more complex to operate than sole proprietorships, partnerships, or LLCs. One of the main disadvantages of a company is the high level of governance and oversight by the board of directors.
Often, this prolongs decision-making when multiple shareholders or investors are involved. So, if setting up a correct business structure is so important, why isn`t there simpler information on the subject? Most likely, the lack of information stems from the variety of structures available and the nuances of each. Even contractors who study the details of each type of structure are often confused with information overload. Therefore, while setting up your business structure isn`t one of the sexiest aspects of starting a business, it can indeed be one of the most important. Key Finding: The five types of business structures are sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Choosing the right structure largely depends on your type of business. As your business grows, you can modify structures to meet its needs. In addition to the legal registration of your business entity, you may need certain licenses and permits to operate.
Depending on the type of business and its activities, it may be necessary to obtain a license at the local, state, and federal levels. A legal form that makes no legal distinction between the individual owner and the company itself. Typical legal structures for corporations are sole proprietorships, limited liability companies (LLCs), partnerships (such as LLPs), and corporations. You need professional legal advice to make this decision, but the first step is to learn what the different structures are, depending on your situation, long-term goals, and preferences. For example, Bob Smith`s lawn care company went bankrupt. Unfortunately for Bob, his company owes over $10,000 to a supplier for equipment he purchased in installments a few months ago. The company no longer has the funds to pay the debt and is structured in such a way that Bob is personally responsible for his company`s debts. The supplier takes action against Bob`s personal property to recover the $10,000. The key factors that differentiate the structures are summarized in the table below: There are also variations in some of these basic legal forms – the S Corporation, the Limited Partnership and the Limited Liability Company (LLC), a relatively new form of corporate organization that has gained legal status in most states.
Investment needs: If your business depends on investors, a business may be the right business structure. Corporate structuring allows a company to sell ownership shares through stock offerings. Existing business structures cannot offer inventory. A well-thought-out business plan serves as a guide to starting and managing your business and choosing its legal structure. As you go through the steps of writing a business plan, you can see more clearly the legal structure you need for your business. Deciding between an LLC and a sole proprietorship is a difficult choice when it comes to legal structure. Many entrepreneurs start their businesses as sole proprietorships because they are easy and inexpensive to set up and maintain. All profits and losses “go” into the owner`s personal tax return, and the owner does not have to pay business tax. Similar to a sole proprietorship, but with multiple owners (a sole proprietorship cannot have more than one owner). Like a sole proprietorship, a partnership is not a separate legal entity from its owners. In addition, business owners with these two business structures must elect senior executives who run the business and keep detailed records of all critical business decisions. No business owner wants to be held personally liable for the company`s debts or pay out of pocket for a judgment against the organization.
How you structure your business at the beginning has a significant impact on your personal liability burden. There are a number of business units that can help protect you, including: forming a corporation, limited liability company (LLC), limited liability company (LLP) or limited partnership (LP). Consider avoiding the sole proprietorship model if you want maximum asset protection. “This entity is ideal for anyone who wants to do business with a family member, friend or associate, such as running a restaurant or agency,” said Sweeney. “A partnership allows partners to share profits and losses and make decisions together within the company structure. Remember that you will be held accountable for the decisions made, as well as the actions of your business partner. The main types of companies are C Corporation and S Corporation. A C company exists as a separate legal entity from its owners, while an S company can have up to 100 shareholders and operates as a partnership. Here are some of the benefits of this business structure: As your business matures, the initial choice of a business structure, no matter how well it performed in the start-up phase, may require adjustment or change.
