4 Ways To Structure Your Business
There are quite a few things you have to consider as you’re getting your business going. Activities such as staffing up, onboarding, and building a website all add up to a significant undertaking. And as per our piece “How Can Accounting Help You in Growing Your Business?”, you’ll need to figure out a strong accounting approach as well. Simply put, there’s a lot to take care of from the outset.
In a broader sense though, you also have to figure out if you’re going to formalize your business, and if so, what structure you should embrace. This part of the process isn’t necessarily as urgent as some of the ones listed above, but it is crucial to making your company sustainable for the long haul. So let’s take a look at some different options that may work for your business.
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Sole Proprietorship
In this business structure, the owner of the company has full ownership of the business. No partners or other stakeholders are involved. In this case, the owner must keep the books, and pay self-employment taxes. There are federal taxes which are the same across the country, and state taxes which… you guessed it… are different in each state. The advantages of this type of business structure, ultimately, are that there are fewer startup requirements, and the business isn’t subject to public disclosure –– which means more privacy for you. Because of these benefits, The Balance reported in 2021 that some 73% of all U.S. businesses are sole proprietorships.
Partnership
A partnership is a business structure in which two or more people own and operate the business together, and therefore share the net gains and losses –– usually equally. It’s an appealing, fairly simple setup to many, though there are some important things to keep in mind. As Stacey Abrams and Lara Hodgson explained in a piece at Harvard Business Review, it’s important for partners to trust and respect one another, and to have rules in place in case things go south. This way, each person is protected from any type of mistake betrayal that may arise.
Limited Liability Company (LLC)
LLCs are businesses that usually have more than one owner, which isn’t the case for partnerships or sole proprietorships. Specifically, AskMoney explains that these businesses are structured through Articles of Organization, which separate the business’s legal name and residence from the managers of the company. The articles also include operating agreements, which establish rules for what happens if a member of the LLC leaves the business or passes away. This type of business is more expensive than a sole proprietorship to set up, but does more to fortify the company for the future. It also carries the key benefit of ensuring that owners are not personally liable for business matters.
Corporation
There are two main types of corporations: S corporations and C corporations. They vary significantly when it comes to taxation, so it’s best to find out what type of corporation you’d like to have based on the IRS’s taxes and compliance requirements. One of the main differences though, when your business gets to this point, is that C corporations do not have a limit to the number of shareholders they can have, whereas S corporations are limited to 100 shareholders.
Starting up and running a business is ambitious, so it’s best to be sure of what you’d like to do right out of the gate. Have a plan ready, and include what type of business structure you’d like to have in that plan.
