What to Consider Before Choosing A Business Structure
Picking the right business structure is a big deal. It is the foundation of your company. It will dictate how you are going to run your venture and who will be involved.
Many businesses start as hobbies or just a fun thing to do in your free time. If that is the case, you likely did not think much about forming a business entity because you may not have thought about your venture as a business—and that’s okay! You can still make a transition into a legal entity, even if you have been creating products or providing services for years.
As your company grows, it is a good idea to at least consider the various benefits and drawbacks of all of the available business structures. You may see the advantages and disadvantages and realize that you do not need to make any changes—but you should take the time to review your situation and ensure that you are continuing down the right path.
There are several business options. They include:
- Limited liability company (LLC)
- Corporation
- Sole proprietorship
- General Partnership
- Professional corporations
- Limited partnership
- Limited liability limited partnership (Missouri)
While reviewing each business type, you should consider several factors. These factors could be very important or relatively minor, depending on your unique situation.
Forming Business
If you are already reporting your income on your taxes (and you should!), then you likely already have a sole proprietorship in place, and you may not even realize it. You do not have to do anything to create a sole proprietorship—you simply have to start running your business.
If you have any other type of business, you will need to go through some extra steps. Formation requirements will vary based on where you create your company, too. If you live in Texas, the process will look very different compared to starting an LLC in Missouri, for example. In Missouri, you will need to create and file your Articles of Organization with the Missouri Secretary of State. In Texas, you would create and submit a Certificate of Formation (which actually requires much more information compared to Missouri) with the Texas Secretary of State.
There are often filing fees associated with whatever documents you need to file. You can also get help with these forms by retaining an attorney or by using online forms. You should consider the costs when deciding how to form and which business structure to choose.
Keeping Up with Formal Filing Requirements
Keep in mind that the initial filings and related fees may not be the only thing you have to do to form and maintain your business. Instead, some entities, like corporations, require that you keep up with filings annually (or at some other regular interval), and these costs can certainly add up over time.
In a corporation, you will also be required by law to have at least one annual meeting of the Board of Directors. There is an array of other formal requirements, as well. If you cannot keep up with the necessary duties, then you run the risk of having the company administratively or otherwise dissolved.
Liability Protection
One of the main reasons that business owners make the transition between sole proprietorship or partnership to another business structure is that these two entities do not offer any liability protection. Instead, your personal assets are exposed to the business’s liabilities, including situations where someone sues your company. Creating a sperate legal entity to perform business functions provides a safety net and reduces your overall risk.
Sale and Transition
You cannot sell a sole proprietorship because you and your business are essentially one and the same. If you want to sell or transfer your interest in your company down the road, perhaps as part of a retirement plan, then you may want to consider a business structure that allows you to sell, such as an LLC or corporation.
Operations and Management
Having a sole proprietorship gives you the ultimate form of control in any business structure—because your company may just involve you. However, if you want others to be involved, using a partnership or LLC may be a better bet.
In a corporation, you can separate ownership and management in a way that may make sense if you have a large number of owners. You can also choose this designation in some cases. When starting a Missouri LLC, for example, the owners can choose to have either a “manager” managed operation or the individual members can run the business.
Raising Capital or Attracting Investors
If you need to attract investors to get your company off the ground, selling ownership stakes is sometimes a great way to do that. However, some business structures limit how you can get investors. For example, adding a partner essentially adds another owner who has many of the same rights and abilities that you do. If that type of control makes you uncomfortable, then creating a limited partnership or a corporation might be a better option for your situation.
Expansion and Growth
Some business owners have big dreams when they start their business. They know that someday they are going to want to expand, and that may require adding more investors or owners. Some business structures, like sole proprietorships, partners, and even LLCs, will not be the best choice if you have big expansion plans. Instead, having the flexibility of adding as many owners or investors as you want is often something only a corporation can effectively accomplish for you.
Taxes and Tax Treatment
Your individual tax situation is the only thing that truly dictates which business structure makes the most sense from a tax perspective. For example, it is straightforward to do taxes for sole proprietorships, a single-member LLC, or an S-corporation, but that does not necessarily mean that is the most cost-effective solution.
Confidentiality and Information-Sharing
You may be surprised to learn that some companies have to make portions of their business operations available to the public if you use a specific type of business structure. For example, a publicly-traded corporation must share certain information based on federal securities laws. In addition, if you have to share your personal tax return with anyone, certain information about your sole proprietorship will be found there, as well.
Making the Right Choice
Only you can make the right decision when it comes to using the right business structure for you. However, having good information at your fingertips can make this process much easier.
