This article is for informational purposes only and should not be construed as legal or financial advice.
When Ascend Finance started, it seemed like an LLC was the correct setup for our business structure, but as we grew, it seemed aprarent that we may need to switch to another business format.
This can be stressful, but it can be helpful to understand your options and the pros and cons of your options.
Selecting the best business structure is one of the primary concerns for every entrepreneur. This is because the structures significantly affect your business operations and performance. Additionally, they regulate ownership and can dictate the running of the business.
As such, deciding on the best structure to adopt in your business is vital. Some business owners decide on the structure at the onset or launch of the company. However, you can always reconsider your business structure decision based on your growth and performance.
It’s best to critically examine the structures before adopting them. With that in mind, here are tips on selecting the best business structure for your business:
1. Consult Professionals
Most entrepreneurs are so green in the business formalities during their launches. You might not know more details concerning the structure and its implications for your business. If you feel that you lack the knowledge, you can consult others who are well-versed in the topic.
You can consult professionals on entrepreneurial advice for an appropriate structure for your business. Engage them in conversations to help you make a sound decision for your business. Their experience and insights come in handy.
They can share their knowledge about state laws that govern the structures’ essential features like registration, taxation, partners, and investors. Thus, it’d be best to ensure you have all the facts right to avoid compromising your business growth abilities. If you don’t consult with professionals, you might miss out on essential laws and requirements.
Hire legal advisers for professional guidance and expert insights on the structures. While at it, ensure you consult reliable and reputable business agents. Reading online reviews, such as Northwest Registered Agent review, can also help you learn more about the agents you want to consult.
2. Research The Business Structures
There are four business structures that you can adopt. Below is a detailed explanation of their features and characteristics.
- Sole proprietorship: As the sole proprietor, you have control and authority over your business. You can make managerial decisions and run your business in a befitting way. This means you’re responsible for legal requirements, such as filing taxes, business registration, and acquiring a trading license within your jurisdiction. This business structure ties the owner to the business such that you can be sued if it fails to pay its dues.
- Limited Liability Companies (LLC): An LLC helps you avoid double taxation by protecting your private assets from business liability. This means as the owner, you’re protected from the financial burdens of your business, as it’s the LLC as an entity that’s subject to taxation.
- Corporations: This structure separates its owners’ liabilities from the business and carries minimal liability. The advantage of using the corporation’s structure is that you have no limit on the number of shareholders you want to use for your company. With a corporation, you can benefit from investors. A board of directors makes all managerial decisions in a corporation. However, during its early stages, the directors can delegate administrative and managerial responsibilities to one of them.
- Partnerships: The structure includes partners who come together and form a business. Every partner is liable for the debts in the partnership. Every sitting member’s opinion counts towards the company’s progress in a partnership. In other words, one partner can’t make managerial decisions. They must involve all other partners. At times, the partners can vote to decide on matters, or delegate specific duties amongst themselves.
It’s essential to understand the features and characteristics of each business structure. This way, you decide on a suitable business structure for your venture.
3. Consider Legal Requirements
When selecting a business structure, you must comply with some legal requirements. The requirements are essential since they help legitimize your business. Note that the requirements vary depending on each structure. For example, you don’t need to file application forms or follow specific operational laws when starting a sole proprietorship. On the other hand, particular codes of conduct govern partnerships and LLCs.
Regardless of which business structure you choose, you’ll need to pay some legal fees for filing or taxation. The prices vary depending on the state you’re forming the business in. Therefore, ensure you know each structure’s legal requirements before using it for your business.
4. Evaluate The Liabilities And Risks
Each business structure has its risks and liabilities. Remember, some structures treat the business and its owners as single entities. As such, you can be responsible for your business obligations. For instance, if you’re operating a sole proprietorship or a partnership, you’d want to avoid risky business ventures that involve high risks. Say, trading stocks. You’re liable for financial obligations, such as debt management of a sole proprietorship.
Using a corporation or an LLC when trading stocks would be best. This way, the business liabilities are treated separately from your assets as the owner.
5. Weigh Its Flexibility
Another essential factor that can help you decide on the best business structure is the flexibility aspect. Running a business includes several roles, like management, accounting, and decision-making. Some business structures require a hands-on mode of operation. You’re in charge of the operational decisions, which could mean spending most of your time at the business premises. If you have other jobs, it’d be best to go for a partnership structure, where different parties run the business while you’re away.
6. Ownership Privileges
The ownership structure is vital for your business. Every business structure has specific ownership privileges. You should go for one that works in the best interest of your business. For instance, forming a partnership works best when starting a company with peers.
Other business structures like the sole proprietorship might not favor the working conditions where several people own the business. Remember, decisions on finances, operations, and policies are made unanimously in setups with several owners. This can reduce productivity when decisions are required to be made on the go.
7. Examine Tax Obligations
Taxes play a significant role in your profit margins. You might be subjected to double taxation if you don’t examine the taxation policies on each structure. For instance, your taxes are calculated from the profits of an LLC. On the other hand, a corporation’s taxes are deducted from its earnings after the expenses.
Therefore, it’s essential to examine the taxation procedures on every structure. This way, you’ll avoid subjecting your business to high taxes and instead choose a structure favoring it.
Conclusion
Selecting a business structure is a vital decision. Take note of the tips shared above to make an informed decision on the best structure. The structure must favor your business since it significantly impacts your operations, ownership, and profits. If you’re not knowledgeable about business-related matters, hiring professionals who can guide you on the right path would be best.
