For most people starting a business, their main focus is simply getting their idea off the ground by any means possible. Along the way they’ll incorporate and eventually, they’ll have a business that’s up and running smoothly (hopefully). What they don’t realize, however, is that choosing the right business structure during incorporation can have a big impact on their business in both the near- and long-term.
Types of business structures
There are several distinct types of business structures to consider if you’re going to incorporating, each with specific nuances and stipulations to define it. Some of the most common include:
Limited Liability Company (LLC)
The chief differentiators of these business types and others is generally centered around three variables: taxation, liability and record-keeping. Understanding the obligations of each business structure can help you set up your company in a way that’s befitting to how you want to run it.
Factors to consider
Before you file articles of incorporation as a specific type of business entity, be sure to take a close look at the following variables:
Tax implications: Some business structures pass on tax burdens and liabilities to owners, while others offer insulation. Likewise, there are personal taxation considerations to be made when it comes to some business structures vs. others. For example, incorporating as an S corporation can help reduce personal tax liability, whereas a sole proprietorship cannot.
Legal liabilities: What happens to you if your business is sued? Understanding what you’re on the hook for personally in the event your business comes under fire is a very important variable to consider. An LLC, for example, can help protect your personal assets in the event the business faces litigation.
Cost of operation: In business with higher standards for record keeping or inventory demands, there’s a cost of operation to consider. Certain business structures help owners in offsetting these costs, while others are better equipped for low-cost operation.
Future plans: Where’s your business headed? If you plan on going public and bringing in shareholders, you’ll need to declare a corporate structure. If your exit strategy is a private sale to a friend or advisor, a partnership may be the better option. You might not know your future needs, but it’s important to look at your ultimate goal for the company when picking a structure.
Administration: Will it just be you managing the business, taking full responsibility for it? Do you have a business partner? A governing board of investors? Depending on the administration of the company, a certain business structure may be more applicable than others.
Picking the best option
So, what’s the best option for your business? It depends entirely on the situation! Understanding how the above variables play out in your scenario will help you pick the right business when it comes time to incorporate.
Lost? Don’t worry—not many entrepreneurs fully grasp the importance of choosing the right business structure. It’s why lawyers, accountants and small business advisors exist! Don’t be afraid to reach out to Baker Law Group toll-free at 1-800-701-0352 as you start to bring your business to market.