WHAT IS THE BEST STRUCTURE FOR MY BUSINESS?

Introduction

Now that you have a solid business strategy and a catchy name (hopefully) and have decided to register your business, it is time to begin the business registration process.

Whatever business or business idea you have, you need to register as a legal entity for tax, liability, and organizational reasons.

The major question that frequently bothers new/prospective business owners is, "what is the best business structure for my business?" The truth is it’s not a one-size-fits-all type of situation. No fixed business structure applies to all businesses, as each has advantages and disadvantages.

So, to choose the best option, you must first understand the key characteristics of each possible business structure, their benefits and drawbacks, the form of ownership you will have in the business, the taxes you will pay, how much capital you have available, the degree of risk you are ready to accept and your long-term goal for your business. This article will discuss some of the most common structures: sole proprietorships, partnerships, limited liability companies (LLCs) and corporations.

Keep reading to learn more!

Sole Proprietorship

It is the simplest and most common type of business structure. Sole proprietorships are easy to form and maintain and offer complete control to the owner. However, sole proprietorships also come with unlimited personal liability, meaning that the owner is personally responsible for all debts and liabilities of the business. All profits and losses of the business go to the owner. There is no distinction between the owner and the business. Establishing a sole proprietorship is simple and does not change any tax structures because the taxes are attached to the business owner's personal income taxes.

Many entrepreneurs have their businesses registered as sole proprietorships. A sole proprietor may have employees but does not receive tax benefits such as a corporate income tax deduction for employee salaries. The employees receive a salary but do not share ownership of the business. A sole proprietorship makes sense for people who want to start small businesses with limited capital. It is also an excellent choice for those who want to test an idea before investing more money.

A sole proprietorship has several advantages:

• It is easy to set up. There are no legal requirements other than having a business name, ownership and an address. There is no tax filing requirement for profits from the business (unless other sources of income need to be reported).
• It has unlimited potential. The owner can make as much profit as possible with little risk since it is not a separate legal entity.
• Easy and relatively cheap to set up: There is minimal paperwork and legal requirements to start a sole proprietorship, and ongoing compliance is relatively simple.
• Complete control: The individual fully controls the business and can make all decisions without consulting others.
• Tax benefits: Sole proprietors may deduct business expenses from their personal income taxes.
• As a sole proprietor, you have a flexible work schedule and can even work from anywhere, depending on the nature of your products/services.

A sole proprietorship also has several disadvantages:

• If you have any losses in your business, they cannot be deducted from your personal income taxes. You must pay the full amount yourself.
• There is no legal separation between you and your business, so all profits are taxed to you as well as any other sources of income such as salary or dividends.
• The owner is personally liable for all debts and lawsuits against the business.
• The business will end when the owner dies or decides to close it, making it difficult to pass on to another generation or sell to someone else.
• Sole proprietorships can only be owned by one person, so expanding the business by bringing in partners can be difficult unless you change to another business structure.
• Raising money from outside investors or lenders may be difficult as a sole proprietor.

Partnership

Partnerships are a popular choice for new businesses because they offer some protection from personal liability while still giving each partner a significant role in running the business. A partnership is a business structure where two or more people share the company ownership. While partnerships can take different forms, two things all partnerships have in common are:

• each partner has an equal say in decision-making
• each partner is personally liable for the debts and liabilities of the business

Some advantages of a partnership include the following:

• It is easier to raise capital than a sole proprietorship because each partner contributes in some way. Partners can pool their financial and other resources to help the business grow and succeed. There is also increased potential to raise money from outside investors or lenders.
• There is shared risk and responsibility among partners.
• Partners can pool their expertise to provide more holistic business management. Partners may bring their varied knowledge, skills and perspectives to the business, which can lead to more innovation and success.
• Shared workload among the partners, leading to more efficient and effective management.

Some disadvantages of a partnership include the following:

• Unlimited liability for debts and obligations of the business because the partners are jointly and individually liable for all debts and lawsuits against the business.
• Partners may have different opinions and goals, which can lead to disagreements among partners and may end the business if not handled properly. Partners may also have different ideas about how the business should be run, which can lead to conflicts and tension.
• Depending on the terms of the agreement signed by the partners, every decision made in the business must be by consensus. Also, where there is a disagreement among partners, and they cannot reach a consensus, the business may be unable to take action until a resolution is reached, limiting its ability to respond quickly to opportunities and threats.
• The partnership will end when one of the partners dies, retires or leaves the business, making it difficult to pass on to another generation or sell to someone else.

Corporation

A corporation is a legal entity that is separate from its owners and can be either for-profit or non-profit. Corporations also provide greater autonomy between the business owner personally and professionally, and there can be advantageous tax consequences to a corporation.

If a corporation cannot pay its debt or gets sued, it generally cannot lose more than the assets in the business. A corporation's owner(s) of a corporation rarely worries about losing their home or other personal assets if something goes wrong with the business. You will need to do some extra paperwork compared to a sole proprietorship or partnership, and you will need to meet some annual administrative requirements, but it is usually worth the extra peace of mind.

Some pros of this structure include the following:

• Limited liability for shareholders as they are generally not personally liable for the corporation's debts and liabilities.
• It is easy to raise capital because corporations can raise money by issuing stocks and bonds, which can attract outside investors.
• Corporations have a potentially unlimited lifespan, so the business can continue even if shareholders die or leave.
• Corporations may be able to take advantage of certain tax deductions and credits that are not available to other business structures.
• Shareholders elect a board of directors to make major business decisions, so the ownership and management of the business can be separated.
• A professional management structure is typically set in a corporation, which eases the minds of investors/shareholders because a professional management structure may ensure the corporation's profitability. 

Some cons of this structure include the following: 

• There is a possibility of double taxation of profits- corporate income tax + shareholder dividends tax. Corporate profits are taxed at the corporate level, and dividends paid to shareholders are taxed again at the personal level.
• There are complex legal and regulatory requirements for a corporation to satisfy. Corporations are subject to more government regulations and reporting requirements than other business structures.
• Setting up and maintaining a corporation can be more expensive than other business structures.
• Shareholders may have little or no control over the corporation's management and direction, as they are not involved in the business's day-to-day operations.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a business structure that combines elements of a corporation and a partnership. It operates similarly to a corporation due to the limited liability benefits, and it works like a partnership due to the greater flexibility and tax benefits.

Some pros of this structure include the following:

• Similar to a corporation, the personal assets of LLC members are generally protected from the debts and liabilities of the business.
• LLCs can be managed by their members or appointed managers, offering flexibility in how the business is run.
• LLCs are generally taxed as a partnership, which means that the business income is "passed through" to the personal income taxes of the members, avoiding double taxation.
• LLCs can have any number of members, unlike other structures like the sole proprietorship.
• LLCs are relatively easy to set up and maintain compared to corporations.

Some cons of this structure include:

• LLCs may have a specific duration as stated in the articles of organization, or they may be dissolved by the members, which can make it difficult for the business to continue after the departure of a member.
• LLCs may have more difficulty raising capital from outside investors than corporations.
• LLCs may be subject to more complex tax rules than other business structures, which can be difficult to navigate.
• Some locations do not have LLCs as a business structure, so it may not be an option in those places.

Having read the points on LLCs and corporations, you may be a little confused about the difference(s) is/are between the two business structures. No worries. We have an upcoming article for you on distinguishing between an LLC and a corporation.

CONCLUSION

In conclusion, the best business structure for your business will depend on various factors, including the size and nature of your business, the number of owners, your personal and financial goals and your long-term goals for the business. Each business structure discussed in this article (sole proprietorship, partnership, limited liability company (LLC), and corporation) has its advantages and disadvantages, so it is important to consult a lawyer to determine which structure is right for your business. Additionally, you should consider the laws and regulations of your state as they might affect your decision and business in the long run.