Selecting the right legal corporate structure for your business takes time and consideration. There are several kinds of business entities, each having its own positives and negatives. The one you choose will greatly impact how you run your business, from liability to taxes to control. Here are the most popular business entities and which factors companies should take a look at when thinking about corporate structure.
Entity Types
Sole Proprietorship
One person is responsible for all profits and debts of the company, giving the owner complete control over all aspects.
Partnership
This is when the company is owned by two or more people. In a general partnership, things are shared on an equal basis. In a limited partnership, one partner retains control of the operations, and the other contributes to just a part of the profit.
Limited Liability Company (LLC)
This is a hybrid structure that means that owners, partners or shareholders have limits to personal liabilities while still getting the tax and flexibility benefits that come with a partnership. LLCs offer more protections and separations than sole proprietorships.
Corporation
This is an entity that is separate from its owners, with its own legal rights. Here are the many types of corporations:
- C corporations
- S corporations
- B corporations
- Closed corporations
- Non-profit corporations
Cooperative
This is owned by the same people it will serve, whereby members vote on the mission and direction of the business.
Factors to Consider
It’s hard to switch your legal structure after registering your business, so selecting the proper one right from the get-go is smart.
Flexibility
The one you choose should support your company’s growth and change, rather than hold it back from any potential.
Complexity
Some entities are simple to run, such as sole proprietorship, but others are more complex, such as corporations and LLCs. The factor you choose should be able to roll with the punches and meet all requirements.
Liability
Make sure you understand the liabilities of each type of entity you consider. Your factor should be experienced with all.
Taxes
Same here. Don’t pay more taxes than you have to. Your factor should be familiar with all structures and know how the tax laws apply to each.
Capital Investment
When you need money from outside funding sources, establish a corporation, because you can sell shares of stock and secure additional funding. This is just one example of capital investments affecting your choices.
Keep in mind, no matter what you choose, your state will have its own requirements for different business structures. There is no one-size-fits-all approach!
For more reading on what company structure might be best for your company, click here to view one of our suggested reading titles.
