One of the first steps to forming a business entity is choosing the proper structure. Every company has different plans, goals and priorities, and it is essential that these all align with the business structure. If you are a first-time business owner, getting lost in the formation process is understandable, especially when you hear unfamiliar concepts. Knowing what factors to consider can help determine which structure is right for you.
Ownership and management
The number of owners and how they plan to manage the business plays an important role when selecting a business structure. Generally, owners, regardless of number, can operate a limited liability company (LLC) or corporation. However, solo owners cannot run a partnership, and a sole proprietorship is not an option for multiple owners. Moreover, companies with multiple owners, partners and investors likely have a more complex decision-making process.
Loans and Investment
Capital investment and adequate financing are important tools to jump-start a business. While some owners use their savings to establish a business, others plan to take out loans from the bank. If you are one of the owners considering a bank loan, note that banks are usually likely to loan out to LLCs and corporations over sole proprietorships and partnerships. Moreover, corporations have a better standing when it comes to gaining investors since they can sell company ownership shares to attract investment.
Liability protection and tax process
Business owners can avoid personal liability depending on their company’s structure. LLCs and corporations are separate entities from their owners. Therefore, the owners and partners cannot be personally liable for the debts and liabilities of the companies. The same cannot be said with sole proprietorships and partnerships since owners are the same legal entity as their business.
When filing taxes, sole proprietorship, partnership and LLC owners have a less complex process since they only have to report company profits and losses through their personal tax returns. On the other hand, corporation owners have to file separately their personal taxes and that of the company.
These are just some factors to consider when selecting your business structure. What works for others may not work for you. It is best to check your business goals and priorities and see which structure can help you achieve them.