How Should You Choose the Right Business Structure?
Business structure defines important aspects of your business, such as its ownership, its operations, and how it’s registered. These can affect your tax responsibilities, admin requirements, and other elements. The correct business structure will protect you legally and financially, while meeting your goals.
When setting up your business, you should therefore take the time to consider the best business structure to choose. It needs to suit your lifestyle, business goals, and future ideas of where you see the business going.
Read the rest of this article to learn about the different business structures, what to consider when choosing a business structure, and how a lawyer can help you make the right decision.
What are Common Business Structures?
There are many business structures, with some of the most common being:
- Sole proprietorship. This is when one person owns and manages the business. It’s the simplest structure, with your costs and income being included in your personal income tax.
- Partnership. This can be general (the partners are responsible for debts) or limited (the partners don’t have control over the company and aren’t responsible for liabilities).
- Limited Liability company (LLC). Under this structure, partners and shareholders can reduce their personal liability and protect their personal assets.
- Corporation. This is a more complex structure but it can be advantageous if you are growing your business or you wish to add shareholders. There are different types of corporations, such as S corps and C corps.
What Should You Consider When Choosing a Business Structure?
There are important factors to think about that will help you to select the most beneficial business structure.
Legal Liability
You should consider what legal protection you require. Think about what potential liability your business faces and if you can afford the risk on a personal level. If not, you should avoid a sole proprietorship or partnership structure. On the other hand, setting up an LLC can prevent you from being completely liable for any risks.
Tax Responsibilities
You can explore more tax options with certain structures. For example, corporations provide more tax options than what you’ll find in a partnership or proprietorship.
With an LLC and some S corps, members make use of pass-through taxation. Instead of the business paying income tax, profits and losses move to the owners of the business so that tax filing is easier and double taxation can be avoided.
Admin Costs
Paperwork and fees associated with them can be costly for some business structures. This is a common reason why people might prefer forming a partnership or sole proprietorship. Both of these structures are easy and cost-effective to set up.
Control
If you want complete control of your business, a sole proprietorship will help you achieve this. However, if you want to have less control, setting up a partnership or corporation will allow greater management flexibility.
Growth
Where do you see your business going? If you want to set up a sole proprietorship now, the structure will fall away if you decide to expand your business and join forces with partners in the future. On the other hand, a C corp is beneficial for expansion and raising capital.
Requirements
Some business structures have more complicated admin and formal requirements you’ll have to stay on top of. However, a partnership and sole proprietorship will have less maintenance required, so they will be appealing to people who want simpler operations.
Business Structure Pros and Cons
Do your research and consider the pros and cons of all business structures. Here’s a rundown of some of them.
Sole proprietorship
Pros
- Easy and cost-effective to set up.
- The owner has full control over all decisions.
- The owner pays taxes as personal income.
Cons
- Unlimited personal liability.
- Potential challenges with raising money.
- Business has to end if you stop working.
Partnership
Pros
- Straightforward setups.
- Costs are shared between partners.
- Pass-through taxation.
Cons
- Partners are liable for debts.
- Partnership disputes can end the business.
- Reduced individual earnings due to shared profits.
Limited Liability company (LLC)
Pros
- Flexibility in management structure.
- Pass-through taxation.
- Personal liability is limited.
Cons
- Regular admin and filings.
- Restrictive ownership transfers.
- High self-employment taxes.
Corporations
Pros
- Liability protection.
- Raising capital is possible with stocks and investors.
- Attractive to investors.
Cons
- Expensive and complex to run.
- Many regulations and formalities need to be met.
- Double taxation.
Do You Need a Lawyer for Help with a Business Structure?
While you don’t always require the assistance of a lawyer when setting up a business and choosing a legal structure for it, it is advisable if you’re unsure of what to choose. A lawyer can help you in various ways.
- They will help you by protecting your personal assets and advising you on a structure that restricts your personal liability.
- They will take your business type, vision, and goals into account so you choose a structure that benefits you.
- They’ll help you avoid expensive tax mistakes.
- They’ll ensure that your choice is legally compliant with all state laws, especially if rules vary in different locations.
- They’ll file all important documentation when registering your business.
Do you need to hire a lawyer for your business structure?
If you want to consult with a lawyer to choose a business structure, you should connect with one on ContractsCounsel, an online legal marketplace that connects clients with reliable lawyers who have been vetted on the platform.
They have the legal expertise, experience, and credentials to help you choose the most advantageous business structure to meet your needs. It will give you peace of mind that you’re not making any mistakes or taking on financial or legal risks that could harm your business.
