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Why is your business structure important

The legal structure of your business has an important impact on how it is taxed, what liabilities it faces, and how easy it can access funding and capital. There are different structures depending on whether your business is a corporation, partnership, limited liability or corporation. Although there are many options, incorporation can offer numerous benefits, including:

Higher chance of securing business financing
Transferable ownership
Security of personal property
Limited liability for legal problems relating to the company
Tax savings
Different credit rating regardless of your personal credit score
Earlier retirement

Every business structure has its own unique ownership, legal, financing, liability and tax considerations.

Types and types of business structures

Each business structure has its advantages, but some types of businesses are better suited for entrepreneurs. It is possible to modify the legal structure of your business as it evolves, but this will add to the administrative steps.

Sole proprietorship

A sole proprietorship is a basic structure that allows for no legal separation between the company and the owner or the manager. It is a simple option that is easy to set up and maintain.

Sole proprietorships are a good choice for ecommerce startups that have low startup costs and liability. A sole proprietorship is the best starting point for ecommerce. It can be transformed into other business structures later.

Solo-proprietors fall under the category of non-employer businesses, meaning they don’t have paid staff. This type of business in the US is the main source of income for around 40% of small-business owners. The remaining 60% receive supplementary income streams.

The pros and cons of sole proprietorship:

You have complete control over your business. Since there are no partners or investors, you can make all decisions regarding your business.
Flexible business structure changes are possible. Being a sole proprietorship does not mean that you will be locked in to it forever. It is possible to easily change to another type of structure in the future.
Lower taxes. It’s usually easier to file taxes as a sole proprietor than for other business structures. There’s one tax filing to keep track of.

Cons for sole proprietorship:

You have unlimited personal liability. A sole proprietorship is a business that has both the owner and the business. This puts your personal assets at risk and means that you are liable for all the activities of your company. Many business owners find this a major deal-breaker.

Partnership

Partnerships are businesses that are owned by more than one person. Each owner or partner contributes capital, skills, or property to the business. Profits are split between partners.

Partnerships can be in one of two forms:

Limited partnership (LP). This means that the partners are not personally liable for any individual negligence. It also protects their personal assets. This type of partnership limits each partner’s liability and gives them control.
General partnership (GPspan styling=”font-weight 400 ;”>). A general partnership is a way to divide the business into predetermined percentages. These percentages can be agreed upon and documented before.

Partnerships typically adopt a pass-through taxation approach. This model applies taxes based on the income of each partner, rather than the company’s revenues.

Pros and cons of partnerships

Sharing responsibility. There’s power in numbers. This is true for partnerships. Your partner can share the load, which can give you greater access to capital in some cases.
Easy setup and management. Establishing a partnership with other businesses is much easier than other structures. You will also need fewer tax forms for ongoing management.

Cons for partnerships:

Conflicts between partners. It is common for partners to not agree on all decisions in partnerships. This can lead to conflict within the company. When entering into an agreement, it is important to make sure you and your partner agree.
Personal liability. Partners don’t have to separate taxes from owners. Owners pay self-employment taxes rather than the business, which can lead to a higher amount due.

Corporation

Corporations are business structures that protect owners from personal liability by seperating the business entity and individuals. This structure takes all risk and allows for easy transfer of business ownership.

Each jurisdiction has its own requirements. Corporations must be filed with each state. The taxes paid by shareholders, local, state and federal, are separate from the taxes that are payable to shareholders. However, whether corporations pay less taxes than individuals is dependent on the state. An accountant can help you choose the right option for your company.

The pros and cons of a company:

To raise capital, you can sell shares. Corporations let owners raise capital via shares. It makes corporations more appealing to certain people as it provides reliable compensation. For example, a corporation can always sell shares if they run out of cash.
Protect your personal property. A corporation also protects shareholder’s personal property. If a customer sues a retailer corporation, and the court rules in their favor, then the corporation must pay. If the corporation doesn’t have the money to pay, the shareholder will not be required to pay the difference.

Cons of a Corporation:

Personal liability remains. You may be subject to more personal liability if the corporation’s records aren’t properly managed. This could happen when lawyers prove that the corporation is not acting as an independent legal entity and “pierce” the corporate veil, resulting in personal liability protection being lost.
It takes more effort to create and manage a corporation. A corporation is more complicated than other business entities. Corporations must be managed separately as legal entities from the time of their formation to the day they cease to exist.

Limited liability company

LLCs are the ideal mix of corporate liability protection and partnership ease. They are technically a type or corporation and fall under the same umbrella as limited liability partnerships.

Members of an LLC are the owners. They pay taxes directly on the profits of the LLC. The LLC structure does not file taxes as an independent legal entity. LLCs that have more than one member may choose to be taxed as corporations or partnerships. This eliminates the possibility of business and personal taxes being separated.

LLCs have steadily gained popularity since their inception. According to IRS data LLCs have seen significant growth, whereas other corporate structures have declined over the past 80 years.

Each state has a different length of LLCs. Some dissolve when a member moves. They are a great business structure for solo founders who just want to start a business.

Pros and Cons of an LLC:

Personal protection: An LLC protects you from any business liability. Creditors won’t seize an owner’s assets to pay for financial damage if the LLC is involved in a lawsuit.
Simple management: LLCs are simpler than other business structures such as corporations. They also have fewer paperwork and less profit-sharing requirements. LLCs are attractive for startups and small- to medium-sized businesses.

Cons for an LLC:

Limited availability: LLCs are not available to all businesses. There may be laws that govern which industries can form LLCs, and any other restrictions or requirements depending on the state.
Taxes: LLC members might need to file additional forms for federal and state taxes. Depending on the number and type of members, as well as local laws or the articles of the LLC, members might need to pay payroll taxes.

How do you choose the right business structure

It is not easy to choose a business structure. Online retailers often start out as partnerships or sole proprietorships before they incorporate. However, unlimited personal liability can be a concern. The choice of business entity depends on many factors. To determine the best business structure for you, it is important to consult an attorney.

Some common considerations are:

Personal responsibility

Incorporating a business creates a separate entity, which reduces personal risk for certain businesses. While some structures provide greater protection, like a corporation or partnership, others offer less. To determine the right level of personal liability, analyze your own situation.

Partnering

You will need to select a business structure that supports a partnership with a partner in your company. There are several options available: a general partnership; an LLC with multiple members; or a corporation.

Hiring employees

Your legal structure plays an important role in hiring staff. Solo proprietors cannot hire employees. If you want to add staff, you will need to modify your business structure. Although being sole proprietor can give you more freedom and flexibility, it is important to think about your future staffing requirements.

Business financing

By incorporating, you can build credit and establish a financial record for your business. This will make it more attractive to potential investors or lenders. Shopify Capital is a funding option that can help you take your company to the next level.

Are you ready to move on?

There are many benefits to incorporating your business, including protecting your personal assets and building credit history and credit history for your company. It may even reduce your income tax in some cases. The most important benefits of business incorporation, however, are not tangible.

Incorporating your business is the first step in transforming your idea into an actual enterprise. However, your success will only come from your continued efforts.

FAQ

What 4 types of business structures are there?

You have the option of choosing from one of these four structures when incorporating a company:

Sole proprietorship
Partnership
Corporation
Limited liability company

What types of businesses are the best for tax?

Taxes are different for each type of business. For example, sole proprietorships are subject to self employment taxes but can reduce their tax burden through itemized deductions. Corporations, on the other hand, are exempt from self-employment taxes. However it is important to carefully consider each structure and determine which one will be most beneficial for you.

Should a corporation be formed or an LLC?

Although both LLCs and corporations offer limited liability to businesses the LLC is better suited for owner-operated SMBs that want less red tape and more flexibility. An LLC is better suited for companies looking to scale up and raise funds.

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Author: Adeel Qayum

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