business structure

Choosing the Right Business Structure

Alan Melton

The difficulties of establishing a business begin at the conception stage. Every decision you arrive at has to be taken with great care because it can make or break the idea you have been cradling. This reality is the very reason why you should have a startup checklist. In addition to a checklist that will help you remember all the things you have to do, it also gravely important to secure the right permits and fill out the right forms when registering your business.

The requirements for starting your business vary greatly depending on the type of business you’re starting. As the US Small Business Administration explains, there are many things to consider when choosing your business structure, and there are pros and cons to every type. We’ll go into them below:

choosing the right business structure

Sole Proprietorship

The simplest organizational structure that’s applicable to businesses is the sole proprietorship. This form of business allows the owner/s to have total control over their company’s operations. The requirements to registering as a sole proprietorship are an employment identification number (EIN), a fictitious business name (FBN) that abides by the rules of your state, a local tax registration certificate, a permit to sell retail goods and collect state sales tax, and other business-related licenses and permits. The greatest advantage of a sole proprietorship can also be its biggest flaw. As the very individual/s who have total control over the business, owners of enterprises that fall under this category are responsible for their own record keeping and IRS tax payments in the form of self-employment taxes. Full control also means that the owner/s can be held personally responsible for the demise of the company and the resulting financial burden.

Limited Liability Company

This organizational structure, which has characteristics of both a sole proprietorship and a corporation, only requires owners to name their LLC, file articles of organization, create an operating agreement and apply for an EIN. One of the biggest perks of registering your business as an LLC is that it can provide owners with a certain level of security by minimizing personal liabilities. In most cases, the protection that an LLC offers can be likened to that of a corporation wherein the owner/s cannot be held liable for the debts of the business. This is because it is considered as a wholly separate entity. Due to the intricacies of subscribing to this kind of business structure, running an LLC can be a little more expensive than operating a sole proprietorship. The owner/s of an LLC must also take the time to set up a corporate bank account and be meticulous in the way they keep business records.

Corporation

Corporations come in two different kinds: subchapter C and S. Depending on the kind of you will be going for and the rules that apply in your state, the requirements you have to meet will vary. For S corporations, owners have to have a domestic corporation that has no more than 100 shareholders, and a single class of stock. As for C corporations, the basic requirements are an annual general meeting for the shareholders, issuance of shares to investors as ownership of the business, an appointed board of directors, and assigned positions in the corporation — complete with roles and responsibilities. A corporation may be the most complex form of a business structure but it provides a lot of benefits. These advantages can include perpetual existence, transferability, business credibility, tax benefits and easier access to capital.

Just like any decision you need to make, make sure that you take the time to properly analyze which structure is best for you.