You’re excited to launch your venture. You already have the name, logo, and even the website ready. But before launching, have you thought about the business structure? The Corporate Finance Institute describes the structure of a business as a legal formation or entity of recognized in a state’s jurisdiction. And it affects the organization’s activities, from management to the amount of taxes it will pay, and daily operations. How your company is structured can attract investors and offer protection against liabilities, making it a major ingredient for sustainable business success. The challenge is choosing between sole proprietorship, limited liability company (LLC), partnership, and corporation. Note, one structure isn’t better than the other, but each has positive and negative impacts. To choose an entity, think of your business’s nature, income distribution, risk reduction, and tax obligations requirement. The tips below will help you get your company’s structure right and minimize problems in the future.
Identify Risk Tolerance
Statistics show 90% of businesses have been sued at least once, with the average cost of litigation being $54,000. These figures confirm that your exposure to legal issues (lawsuits) is high when you run a business. Learning your business’s risks or potential for lawsuits can help in selecting the right legal path. For instance, if you’re operating a trade alone (sole proprietorship), you, as the owner, are accountable for injuries, unsettled debts, and damages the company incurs.
This means if clients or workers sue you for debts or injuries, your assets can be used for settlement if found at fault. So, it’s best to avoid the sole proprietorship structure if your venture is at risk of attracting debts and personal injuries. Corporations (C corporations and S corporations) and LLCs shield your personal assets from being used to compensate plaintiffs (complainants) as they offer limited liability to their members. When your company is an LLC or a corporation you enjoy maximum legal protection.
Set-up Fees And Legal Services
A business entity or structure will cost $145 to $1,000 depending on location. When calculating business startup expenses, factor in the amount you’ll be spending on a legal entity or incorporation. With start up business loan without collatera cost estimates you can determine which structure matches your business and finances. The formation of sole proprietorship is the least expensive and simplest, for instance. You’ll spend a few hundred dollars on the registration of a business name. And you don’t have to worry about filing paperwork annually. However, sole proprietorship limits you from selling stocks, making it harder to raise capital and increasing your out-of-pocket expenses.
Partnerships, LLCs, and corporations, on the other hand, attract filing fee, legal service fee, and franchise tax (taxes paid to do business in a state). These expenses come with the benefit of limited personal liability loans and the freedom to sell stocks. For instance, if you’re registering your business as an LLC, it’s mandatory that you file articles of organization with your state. The process is complex. You’ll need legal LLC formation services offered by Registered Agents. So, on top of filing fees, there are legal service charges. But you can check out this promo to lower your LLC formation costs and enjoy various services, from professional paperwork filing to the creation of a digital mailbox for your legal documents. Your Registered Agent will also provide annual reports and provide 24/7 customer support.
Structure of Management
Knowing how your business will be managed from the onset helps you choose a perfect structure effortlessly. If you want to launch a home-based business, which you’ll be managing alone, for example, a sole proprietorship is appropriate. As a sole trader, you decide alone and sole proprietorship gives you unlimited control over operations and decision-making. Plus, sole proprietorship stands as a pass-through entity, meaning traders have zero risk of double taxation (paying personal and business taxes). However, if you’re founding a trade with multiple owners, management can be complex.
You’ll have members bringing in different ideas, which creates challenges in reaching agreements even for the most basic issues. A business of this nature can be formed as a partnership, with a clear agreement that defines roles, decision-making authority, and responsibilities. Alternatively, you could choose a corporation, which offers a more formal structure that supports a hierarchical way of making decisions. In corporations, a board of directors and officers are elected by shareholders. The board setting takes charge of strategic planning, officers manage daily operations, and shareholders vote on critical decisions. For more managerial flexibility, an LLC is ideal, as members can be active in business operations.
The structure of a company impacts long-term success. A wrong entity could mean double taxation or increased liabilities. So, before opting for an LLC (limited liability company), sole proprietorship, partnership, and corporation assess each one carefully. Know what your business requirements are also. The structure you end up choosing will be based on the company’s risk tolerance (potential liability), costs and legal services, and management complexity.