How to Choose the Ideal Legal Structure for Your Business
The way you form your business is a crucial decision since there can be implications. The ideal business structure is based on various factors such as the type of business you have, your plans for your business in the future, and your strategies on how to deal and lessen deductions among many others. Continue reading to learn more
Business Structure Types
A sole proprietorship is the most common business structure. It is easy to start and the owner has full managerial control. Nevertheless, the owner is responsible for the financial accountabilities of the business.
2 or more people share the profits and losses of a business. One main benefit of this business structure is that there is no double taxation which can be true to a corporate business structure. The drawback is accountability. The partners are individually liable for the debts of the partnership.
It is one of the most popular legal bodies in the USA to do business. A corporation turns into an entity different from those who have established it. Similar to a person, there are also taxes and legal liabilities for the actions. It can also have an income. One key advantage of this is that personal liability is avoided. Nevertheless, aside from being more costly to structure, there is also a requirement of comprehensive record-keeping needed.
A limited liability company or LLC is a hybrid of partnership. It has become popular since it lets owners enjoy the benefits of a corporation and partnership business structures. The benefits of LLCs are profits that can be passed to the owners without taxing the business and the owners are protected from personal liability.
Factors to Consider When Choosing a Business Structure
Some of the questions you ask yourself are where you envision your business and what legal business structure will help make that possible. You can check your business plan and go through your goals. Reviewing the objects will let you realize what business structure aligns with your objectives. The business structure should give support for possible change and growth instead of holding back the business’ potential.
A sole proprietorship is the simplest when startup and operation complexities are considered. You just need to register your name, begin business operations, track the profits, and pay taxes in the form of personal income.
Nevertheless, it can be a challenge to get external funding. On the other hand, a partnership needs a signed approval defining the roles and profit percentages. LLCs and corporations have different requirements for reporting in state governments and the federal government.
The business structure that has the least personal liability is a corporation. That is because the law considers it as a separate entity. Therefore, customers and creditors can file a lawsuit against the corporation, but the personal assets of the shareholders or officers can be accessed. LLCs also provide the same protection, but it has the same tax benefits as a sole proprietorship. The partnership agreement defines the accountability shared in a partnership.
An LLC owner pays taxes the same sole proprietors do. All the profits are considered personal income and the taxes need to be paid by the end of the year. People in a partnership say that the profit share is considered personal income. An accountant can recommend making advance payments every quarter or biannually. The reason for this is to lessen your return’s end effect.
Corporations process their tax returns every year which includes making payments on profits after the costs such as payroll. You will pay personal taxes such as Medicare and Social Security on your return if you get your pay from the corporation.
A sole proprietorship or an LLC can be an ideal choice for you if you want full control of the company and its activities. Control in partnerships can be discussed in the partnership agreement.
Corporations are made to have board members who make important decisions and guide the company. Even though 1 person can have control of a corporation especially at the beginning, it will eventually grow. Therefore, there will be a need for board directors for operations.
A corporation can be a better option if you have to get external funding from a bank, venture capitalist, or investor. It is easier for corporations to obtain external funding compared to sole proprietorships.
Corporations can sell their stock shares and get extra funding for expansion. Sole proprietors, on the other hand, can only get funds from their accounts, own credit, or by having partners. LLCs are likely to have the same difficulties. However, as an entity, owners are not required to utilize their assets or credit all the time.
Licenses and Permits
Aside from registering your business to make it a legal entity, you need to get particular licenses and permits so that you can operate. Depending on the industry and activities of your business, you may need to get licenses from local, state, and federal governments.
You have to keep in mind that states have different requirements for each business structure. Since there is no one-size-fits-all for obtaining licenses and permits, it is important that you fully understand the industry and state where you will do business.
Finally, understanding the structures and the factors you need to consider greatly helps in picking the right legal business structure for your business. If you are still unsure what business structure to pick, it is best to get advice from a specialist.