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Finding the appropriate business structure for your company is one of the central aspects that should be dealt with when starting out. This will have legal and financial implications on its development and ultimately define its performance.
As such, it is essential that people looking to start a company seek professional advice in this matter. A business expert can analyze its specific features and advise the owner or owners on what type of structure is best suited for their entrepreneurial endeavor.
In this article, we will present the main types of business structures and their central characteristics. Then, we will discuss the primary steps towards identifying which one is compatible with the type of company that the new owners want to build.
The Main Types of Business Structures
A company’s structure depends on the number of owners it has and the financial and legal matters it is bound to. Each type of structure is meant to optimize the development of a certain type of business and to respond to the demands its owners.
1. Sole Partnership
The main characteristic of this structure is that it has a single owner, who has the complete control of all the managerial aspects regarding the company. As such, the owner must also oversee the financial and legal matters concerning it, as he/she is personally liable for these types of obligations.
This is the most common structure in the financial world because it is the easiest to create. Furthermore, its main advantage is that the company itself it not taxed. Instead, owners are required to include profits and losses in their individual tax returns.
In a partnership, two or more owners share in the profits of the company. As for the sole partnership, the partners are personally liable for any legal or financial issues. The main advantage of this powerful structure is that the owners will report the profits and losses of their company on their individual income tax returns. As such, the profits are not taxed directly.
A corporation is entirely different from partnerships in that the owners are not personally liable for financial or legal matters concerning the company. The corporation is a solid financial entity that can conduct business, make a profit, pay taxes, and be liable for any business-related issue, but that is entirely separate from its owners. The central disadvantages of corporations are the high costs of forming them and the extensive record keeping they require for the entire course of their development. Furthermore, a corporation will be taxed directly, which could prove to be a major drawback.
4. The Limited Liability Company (LLC)
This increasingly popular structure features the fundamental advantages of both partnerships and corporations. An LLC can have owners, and as such, the owners will be taxed instead of the company. Moreover, the owners of an LLC will not be personally liable for the legal and financial issues.
Aspects To Consider When Selecting a Business Structure
Finding the best-suited structure for a new business is not a decision, but more of a process because it entails a significant amount of planning. Seeking the assistance of a professional analyst is extremely important for this endeavor.
The analyst can explain the major effects that the structure will have on the development of the business and offer valuable advice as to which type is best in line with the expectations of the founders. However, the choice will ultimately be made by the owners of the company. Here are few valuable aspects that they should consider in their decision-making process:
1. The Costs of Forming and Maintaining the Company
The financial implications of creating, developing, and maintaining a company are the primary aspects that the owners should consider because it could help them limit their options. The costs of creating a corporation are significantly higher than those required for partnerships, which is the main reason why the sole partnership remains the most popular structure in the financial world.
2. The Legal Liability of the Owners
Each business structure exposes the owners to a certain type of legal liability regarding company issues. Founders should seek the council of an analyst when assessing this matter because they need to be fully aware of the extent of the legal liability they are facing.
3. The Tax Criterion
The structure of the company dictates how it will be taxed, which is crucial for the assuring its successful development. As such, owners must consider this aspect carefully to avoid upcoming legal and financial issues with their company. A professional could help founders identify the best taxation plan for their company.
4. The Flexibility of the Company
The sole partnership grants complete authority to the owner, while a partnership requires all the founders to be intimately involved in the decision-making process. It is essential that partners discuss the implications of this aspect, as it will dictate the entire development of their business. Moreover, they should be brutally honest when assessing this crucial matter because their decision will affect the success of the company.
5. The Long Term Requirements of the Company
A business expert could offer valuable insight into the future requirements of a company. The owners should be properly prepared to meet financial, legal, and decision-making obligations. They must be fully aware of the long-term responsibilities and make sure that they can fully commit to meeting them.
Owners should consider every aspect of their development plan to determine the best-suited structure for their company. They should seek professional help to make sure they fully understand the entire array of financial and legal implications of each business structure. This will help them find which is the ideal fit for their entrepreneurial objectives.
Graham Rand is a technical writing passionate who evolved over years of working in the IT field. After graduating from University of Massachusetts Lowell, Business Administration program, Graham worked as a documentation specialist and technical trainer. Even though technical writing is his main passion, he also contributes regularly for LoginOz.com with business related articles.