Choosing a business structure is important since it affects many aspects of running a company, such as eligibility for grants and loans, personal liability for corporate debts, and tax liabilities.
To help you determine which business structure is most suited for your next endeavor, this article will identify the most popular business structures, discuss their advantages, and list some of the most common situations in which they are used.
Business Structure: 5 Options You Can Choose From
1. Sole Proprietorship
In terms of business structure, sole proprietorships are the most common type. In sole proprietorships, one individual acts as both owner and manager. If you want complete managerial discretion over your enterprise, then the sole proprietorship option may be the best.
A sole proprietorship does not result in forming a legal entity independent from its owner. Your assets and business liabilities are inseparable. When calculating the taxable income, sole owners must factor in their business and personal expenses.
Sole proprietors are personally responsible for the debts and losses of the business. Therefore, your personal assets can be at risk if the company incurs debt.
2. Limited liability Company (LLC)
An LLC is a hybrid business structure that, like a corporation, limits the personal responsibility of the owners of the business (members) but permits the business’s earnings to be taxed either at the level of the members or at the level of the corporation. Here are some advances of incorporating your LLC:
i. Protected Personal Assets
Creating an LLC establishes a legal entity for the business apart from its owners. Your bank accounts, vehicles, real estate, and other personal property are protected from legal action in this way. With this structure, you will not be personally liable for the debts and liabilities incurred by the business.
ii. Tax Flexibility
LLCs are “pass-through” entities for tax purposes, meaning they are regarded similarly to sole proprietorships and partnerships. Limited Liability Companies are exempt from double taxation.
In addition, the owner is exempt from paying unemployment insurance contributions on income earned by the business. However, an LLC can choose to be taxed like a corporation by filing either a C-corporation or an S-corporation registration.
LLCs are exempt from formalities associated with incorporating a business, such as electing officers, holding annual meetings, drafting bylaws, and keeping records of company minutes and resolutions. Hence, it is easier and less expensive to run.
If you’re an entrepreneur looking to start up an LLC in Texas, you can hire LLC services to form an LLC for you.
A partnership is a basic legal structure for two or more persons to form a business together. The owners of a partnership can share liabilities and have an equal stake in the company.
Depending on where they live, they may or may not be required to register the partnership with their state. There are primarily two types of partnerships:
i. General Partnerships (GP)
Partners in a general partnership run the business and personally assume any debts or other obligations incurred by the partnership. Even if the partners establish different terms in the partnership agreement, it is common practice for ownership and profits to be equally distributed among the partners.
When a business is structured as a general partnership, each of the partners holds the independent power to bind the company to contracts and loans. Additionally, each partner is individually accountable for the entirety of the company’s financial responsibilities and legal obligations.
ii. Limited Partnerships (LP)
In this type of partnership, there is at least one general partner who is in charge of everything, and there may also be one or more limited partners who invest capital but do not participate in running the business.
Limited partners are not active members of the partnership but rather passive investors who contribute capital in exchange for a share of the earnings. The limited partnership structure might be useful for setting up a business with people who share a common interest in investing, such as family or friends.
It is crucial to seek legal advice before entering any kind of partnership, regardless of the form you are considering.
4. C Corporation
A C corporation, which is often referred to simply as a “corporation,” is a type of business structure in which the members of the business and the business itself are regarded as entirely separate legal entities.
This ensures that a corporation is not dependent on the actions of a single individual and that it will continue to function normally if one of its board members or owners passes away or resigns from its position.
In contrast, a limited liability company (LLC) can have one or more owners and will automatically dissolve upon the death of any one of its members.
This type of business structure is more suitable for larger enterprises. It’s a solid corporate structure if you want to expand your business, go public with a stock offering, or entice investors and capitalists. McDonald’s, Microsoft, and Walmart are examples of C corporations.
5. S Corporation
Like a C corporation, an S Corporation (S Corp) is a type of business structure in which the business and its shareholders are treated as two distinct entities. In contrast to C corporations, members of S corporations can receive direct distributions of their profit (and loss) allocations, avoiding double taxation.
There are several strict requirements to operate as an S Corp, which may disqualify a business from seeking the status in the first place. Since S Corporations are limited to no more than 100 shareholders, they cannot qualify to go public.
Individual U.S. citizens or permanent residents and certain domestic trusts, estates, and tax-exempt organizations are the primary categories of eligible purchasers.
Factors To Consider
Think about the following factors while choosing the best business structure for your business’s short- and long-term requirements:
- Legal Protection
- Local and state laws
- Number and type of owners
Assessing your risk potential, protecting your assets, and optimizing growth investment are the primary considerations before you choose a legal business structure.
Making an informed decision about the legal structure your business will take is vital. Consulting with legal, financial, and commercial experts who can assess your circumstances and provide tailored recommendations is essential before making a decision.