The formation of a business involves numerous decisions. Who will be involved (as an owner, investor, employee, etc.)? Where will your business be located? What will it be named? How many employees (if any) will you hire? One of the most significant choices you will make is the selection of a business structure or entity. Your legal organization will affect many aspects of your business, including your taxes, your paperwork, and your personal liability. Use the tips below to learn how to choose a business structure.
How to Choose a Business Structure
Some of the most common business structures are sole proprietorships, partnerships, corporations, and limited liability companies (LLCs). These structures come in other forms as well, like limited partnerships (LPs) and small business corporations (S-corporations). If you’re wondering how to choose a business structure, consider the following factors:
If you’re like most business owners, you’re hoping to minimize your business’s taxes. Consider the opportunities you have to reduce taxation. For example, if you have less than 70 shareholders, you might consider an S-corporation to avoid double taxation, a drawback of corporations (the corporation must pay taxes on its income and the shareholders must pay taxes on dividends). Sole proprietorships and partnerships also avoid double taxation, while LLCs can choose whether to be taxed liked a partnership or a corporation.
Risk & Personal Liability
Many business owners wish to avoid personal liability for potential losses associated with their business. As you form your business, consider the extent to which you wish to insulate yourself from legal liability. If you’re willing to accept the risk, you might consider a sole proprietorship or partnership. If not, consider using an LLC to protect your personal assets.
A corporate structure allows a business to sell ownership shares in the company and issue employee stock options. If these features are important to you, consider incorporation. If not (and if you never plan to go public), incorporation probably isn’t worth the expense and paperwork. Consider an LLC instead, which will offer the limited liability of a corporation with greater simplicity and flexibility.
Record keeping can be time consuming and expensive, so most business owners wish to minimize it if at all possible. Sole proprietorships are a good option for those who wish to avoid reporting requirements, but you may find that those requirements are worth it for the taxation and liability benefits provided by corporations and limited liability companies. As no business structure is indisputably the best, weigh the pros and cons of your options.
Although it is important to consider your business’s future when selecting a business structure, remember that your choice isn’t set in stone. If your business grows, your liability risk increases, or you decide to go public, you can always convert your business to another entity.
Finally, contact the attorneys at Replogle, Tyrrell & Robertson if you’re having trouble selecting a business structure or forming your business. We can help you assess your options while keeping important factors in mind, like privacy, partner rights, and asset protection. With our help, you will be able to make the best decision for your company. To get started, simply give us a call at 417-859-3979 (Marshfield office) or 417-893-5121 (Springfield office) or contact us online.