When you start a new business, it is vital in the beginning that you choose the right business structure to suit your needs. It is an important decision to make, as it will impact your day-to-day activities, legal obligations, taxes, liability, and risks. There are different business structures that you can choose from, each with its own features and benefits. You need to choose the one that is the most suitable for setting up, as well as where you want to take your business in the future.
If you’re not sure what business structure is best for you, here is some more information on each type, to help you make a decision.
#1 Sole proprietorship
This is an easy and simple way to get your business up and running. This structure means that the business is exclusively owned and managed by one person and is simply an individual using a trading name. The owner of the business is responsible for everything, including the profits, the losses, and all liability.
There is little investment involved at the beginning when setting up a business as a sole proprietorship and is easy to dissolve in the case of business closure or the death of the owner. If the business earns over a certain threshold, then the business is liable to pay tax and observe basic bookkeeping. Other than this, there are no other formalities necessary for this business structure.
#2 Partnership
This structure is used when there are two or more individuals who are associated in business for profit. All individuals involved in the partnership are responsible for profits, losses, and liabilities. However, upon entering an agreement to go into business together, the individuals may agree to share the profits and losses equally, which then must be reported to the government by filing an informational return to show how the accounts were split. This structure is also an inexpensive way to form a company, however, the tax can be slightly more complex. The partnership can be set up in several ways, including a general partnership, a limited partnership, or a joint venture.
#3 Corporation
A corporation is a much more formal way to structure a business, as it establishes the business as a legal entity according to the laws of the state which is separate from the individual who owns it. This means that individuals can come and go and can transfer ownership interests, but the business will remain intact unless it is dissolved. A corporation involves appointing shareholders and a director, so there is central management and can ensure everyone's interests are represented. The corporation is liable and can be sued or sue others, however, the liability of shareholders is determined by the number of shares they hold. The tax implications of a business corporation structure are much more complex, so a CPA Accountant is recommended to ensure the business remains compliant.
#4 Limited Liability Company
This is a flexible structure that can be as complex or as simple as the owners choose. Liability can be treated the same as a business corporation setup, or it can be spread around the members, with some being liable and others not. If something happens to a member, such as death or bankruptcy, then there must be a vote to continue the business, or it must dissolve.
Choosing the right business structure is vital when setting up a business. Make sure you do your research and choose the option that best meets your business needs.