It’s impossible to start a business without deciding of its structure. That’s why this decision is one of the most important you’ll make in the process of starting up your own business. Selection of ownership structure will have a major impact on taxation, needed paperwork and personal liability. There are many key factors influencing the choice you’ll make, and you should consider them all, so you could, wholeheartedly, say you have made the right call. We’ll try to help you with that by suggesting what you should keep in mind, and the rest is up to you.
Risks and liabilities
Ownership structure depends of the type of products you are selling or services you provide. For more risky endeavors, such as trading stocks, it is best to opt for a structure with limited liability, so that you don’t have to be personally responsible and sanctioned for every loss. That way, you’ll be protected from the risk of using your personal assets for debts and claims. In that case, the best choice would be a limited liability company (LLC) or a corporation.
Startup expenses and formalities
Some structures are easier to setup than others, depending of the costs and needed licenses and other formalities. The one that requires the least effort and money is definitely, sole proprietorship. Companies and corporations are more difficult to form and maintain, and also more expensive. They also demand a lot of formalities, in the form of records of business decisions. So, if you are starting small with some simple business, sole proprietorship should be enough, but if you opt for risky job, then opting for a structure with limited responsibility is worth the money.
Taxation pros and cons
Every business, as every person, has to pay its taxes. As tax is usually a complicated issue, consult a business advisory. No matter what is your chosen structure, you’ll pay taxes on profit, which are the same for sole proprietorship, partnership and limited liability companies, meaning that all the losses and profits are reported as personal income tax returns. Unlike these structures, owners of corporations are free of personal taxation as the corporation is view as a person who pays its own taxes. Corporations have lower tax rate.
There are not many formal investments when it comes to sole proprietorship and partnership, you can invest your own personal money, and that’s it. As for corporations, they are able to sell shares in the ownership via stock market, which is making a lot easier and appealing for someone to invest capital in them. But, as the corporation costs a lot of money, and not everyone have or want to have an option of selling stocks, LLC is a better choice.
It’s not set in stone
When just starting a business you are not sure what you should do and how to do it and it can even happen for you to make a “mistake” with choosing a structure, and you realize that along the way. It’s not the end of the world. You can change the structure as you go if you find and adequate business partner or experience risk growth, etc.
Learn what are the pros and cons of every structure, put it on paper and then choose the best one for you.