Selecting the appropriate business organization may make or break your company’s success and your peace of mind. Here’s what you should know.
What you’ll discover:
How do I choose the best business structure?
What are the most frequent business structures used by small businesses?
Although many small companies in the United States are struggling to remain afloat during the epidemic, many more are just getting started or expect to start after the new year. In honor of National Entrepreneurship Month, the Everyday Law blog will be providing a wealth of valuable information every Monday to assist you with anything from selecting a company name to safeguarding your personal assets to selecting a business entity, which is what we’ll be addressing today. Although it is not the most glamorous of business jobs, selecting the correct legal structure may make the difference between a flourishing firm and one that must close its doors after just a year or two. Now let’s get this party started!
Table of Contents
How do I choose the best business structure?
The “correct” company structure for you may differ from that of other firms. What works for the flooring store down the street may not work for the consulting firm you’re launching.
Knowledge is power, and doing research on business organizations can assist you in making an educated and correct selection that is customized to what you and your company need to prosper for years to come.
Here are a few questions to think about as you begin this process.
How many individuals will have a stake in the company?
How do I intend to entice investors? Do I need to find investors?
Will the company have significant assets?
Is a physical place required?
What kind of customers do you wish to attract? Are your customers anticipating a “Inc.” at the end of your business name?
Are you intending to retain the company’s profits? Or are you more concerned with helping the community as a whole?
Answering some of these fundamental questions will steer you toward one form of entity over another.
What are the most frequent business structures used by small businesses?
Many people’s initial thoughts when considering a corporate entity are of large firms, many of which are publicly listed. These are standard C-corporations.
Although that form of company structure works well for certain businesses, many new entrepreneurs simply do not need that framework to get started. That sort of organizational structure may be in your future, but it is not always the best solution for those just beginning out.
Alternatively, entrepreneurs may wish to examine several additional entity alternatives that provide outstanding advantages while avoiding the legal formalities necessary to establish and manage a C-corporation.
Partnerships and sole proprietorships
The most frequent sort of company structure is the single proprietorship. In reality, approximately 23 million single proprietorships exist in the United States today.
One of the reasons they are so popular is because they need no additional procedures to establish. There are no official criteria to launch a sole proprietorship; instead, you just file your taxes somewhat differently.
It is by far the simplest sort of company entity to operate since the filing and formal requirements are so few. Yet, this does not imply that it is the ideal solution for every company. Sole proprietorships do not provide some of the numerous advantages that other companies provide, such as restricted liability, the capacity to have several owners, or any viable way of attracting investors.
Partnerships work similarly to sole proprietorships, except there are more people involved. Creating one is often as simple as forming a single proprietorship. General partnerships, on the other hand, are potentially riskier since someone other than you may bind the partnership and put your personal assets at risk if the partnership fails to pay its expenses or is sued.
A sole proprietorship or partnership may be an excellent starting point for many businesses, but it should not be a form that you utilize permanently in most instances.
Limited Liability Corporation (LLC)
A limited liability company, or LLC, is a hybrid business structure that combines the finest aspects of a sole proprietorship (or partnership) and a corporation. An LLC provides the following advantages:
Liability is limited. An LLC enables each owner to restrict their responsibility to the assets owned by the firm. That is, as long as certain requirements are followed, each owner’s personal assets, such as their home or vehicle, are not jeopardized if the LLC fails to pay its debts or is sued.
There is no membership limit. Your LLC may have an almost limitless number of members. You may even divide membership into classes, with some members having greater privileges (such as the ability to vote) than others. This may be an effective method of attracting investment.
There are fewer formalities than with companies. As comparison to founding a corporation, forming an LLC requires significantly less paperwork, yearly or bi-annual filings, and expenses. In addition, forming an LLC is frequently less costly and time consuming than forming a corporation.
Businesses that are not for profit
Many business owners underestimate the opportunity of establishing a non-profit organization. Creating a non-profit, on the other hand, may be a terrific way to serve the community. When you establish a tax-favored non-profit organization rather than a for-profit corporation, you are frequently better equipped to generate cash and guarantee that your civic and social aims are realized.
S-Corporations
The firm is taxed at the corporate level initially in a standard C-corporation. When the income is distributed to the owners, it is taxed again at their respective tax rates. This “double taxation” is totally avoided with an S-corporation since the company is only taxed at the individual owner’s rates—there is no special corporate tax rate that applies.
This structure is identical to an LLC, except that any money provided to owners (that are not wages) are normally taxed as “distributions” rather than income.
In contrast to an LLC, an S-corp must follow tight legal rules for establishment and upkeep. There are also certain restrictions on how you may produce revenue. For example, an S-corporation may only get up to 25% of its revenue from passive activities such as real estate investment.
