Starting a business can bring up a whole mixture of emotions – it can be exciting, scary, and often at least a little bit confusing.
You don’t need to have achieved an MBA or even gotten any formal business training to start and grow your own successful company, but there are some important choices and decisions that you will need to make, right from the very beginning. This includes choosing your business structure or entity.
What Are the Most Common Business Structures?
The most common business structures are:
- Sole proprietorship
- Limited Liability Company (LLC)
- Standard corporation (C corp)
- Small business corporation (S corp)
- Benefit Corporation (B corp)
Why Is My Choice of Business Structure Important?
The choice that you make about the kind of business structure that is appropriate for your company will affect a wide range of different factors, including how much you will pay in taxes, the level of liability or risk to your assets such as your home or personal savings, and even your ability to raise funding from venture capitalists or angel investors.
So, as you can see – the structure that you choose is very important.
1. Sole Proprietorship
The sole proprietorship is the simplest business structure; your business will be one if you do not create a separate legal entity for it, whether you are operating in your name or under a trade-name.
One of the main advantages of opting for a sole proprietorship is that it is usually quite simple and inexpensive to set up.
On the other hand, the disadvantage is that it does not create a legal separation between you and your assets and any business assets. If you are sued, or if your business fails, your assets will be fair game in terms of legal liability.
If you’re planning on running your small business by yourself and being self-employed, then this business structure may be the right option for you.
There is no official registration action required on your part, however, you may still need to consider licensing, permits and other regulations – the best thing to do is check with your local secretary of state’s official website. And if you’re planning on doing business under a name that is not your own, you will need to file a DBA (“doing business as”).
If you’re looking to go into business with somebody else, then a partnership is likely going to be the business structure that you need.
A partnership is when two or more entrepreneurs share ownership, along with sharing input, investment, and participation in the company. This is still quite a simple business structure and involves at least two individuals sharing ownership of a business. They both contribute to the company in some way, and will both share in profits and losses.
Since they change so much, partnerships can be more difficult to describe – they are governed by state law, under the Uniform Partnership Act, which sets the specific partnership agreement at the legal core of the business, meaning that the specifics can easily vary.
If you think that a partnership might be the right structure choice for your business, then make sure that you do it correctly.
The best thing to do is to find an attorney who specializes in this kind of business structure and get references from their past and current clients. Partnership agreements can be complicated with lots of grey areas, and a mistake can cause you serious problems further down the line.
3. Limited Liability Company (LLC)
What is an LLC? In short, it’s when your business is a completely separate entity to yourself. If the idea of being held personally liable should your business fall on hard times does not seem very appealing to you, then this business structure is probably an ideal choice for your company.
In many ways, an LLC is the best of both worlds – it allows entrepreneurs to enjoy the flexibility that would come with a sole proprietorship or partnership, but limits the liability of those involved in a similar way to a corporation.
If you have valuable or large personal assets that you wish to protect when starting your new business, an LLC might be the right choice for you.
Also, if you are setting up a company in an industry where lawsuits aren’t uncommon, choosing this kind of business structure can be a way to potentially add a layer of protection for your assets should the worst happen.
The process of forming an LLC is slightly more complicated compared to a sole proprietorship or partnership; read the article on this website to find out more. With the guide from Truic, you can find out where to form an LLC, how to form one, and whether it is right for you. You will need to choose a business name, file articles of organization, and create an operating agreement.
When most people think of business structures, a corporation is the one that probably comes to mind first. A more complex legal structure, shareholders, and more intricate taxation requirements are all key characteristics of a corporation.
These are either the standard ‘C’ corporation, the small business ‘S’ corporation, or the benefit ‘B’ corporation. The C corporation is the classic structure for the majority of successful U.S. companies.
Corporations can switch from C to S and back again, however, this isn’t allowed often; the IRS has strict rules and guidelines when it comes to how and when these switches can be made.
If you want to switch from a C corp to an S corp or vice versa, then it’s best to have a CPA or an attorney guide you through the legal requirements.
A corporation is the most complex business structure. If you’re starting a small business and are working either on your own or with a small team, then it probably isn’t the right option for you.
It is usually recommended for companies that are larger and more established with larger numbers of employees, many outside investors, quick scaling, and the intention to sell stocks.
Which of these business structures is the right option for you?