Establishing a company structure is one of the most crucial decisions made when starting up a new business, affecting everything from legal protection and tax obligations to being able to raise capital.
C corporations offer shareholders comprehensive legal protection, but require significant paperwork and may be unsuitable for startups that require rapid expansion.
Sole Proprietorship
Entrepreneurs likely relish the excitement of building an amazing website, prototyping a groundbreaking product or landing their first big order – all things which excite most entrepreneurs! But selecting an appropriate business structure for their startup is also crucially important and has long-term ramifications.
A sole proprietorship is one of the easiest forms of organization, offering low initial costs and minimal paperwork requirements. However, its primary disadvantage lies in that all assets and debts associated with the business fall under its full responsibility and liability – this may make attracting investors or obtaining loans more challenging as lenders typically prefer businesses offering greater protection to their investments.
Selecting the proper company structure is a vital decision for any aspiring entrepreneur and should be carefully thought through based on demands, goals and potential risks. Consulting an attorney and tax professional is essential in selecting a structure which best meets your startup’s needs; doing so will provide legal protections as well as clear paths for ownership transfers and greater stability for its future development.
Partnership
As an individual or with co-founders, choosing an effective company structure early can have profound operational, legal and tax repercussions for startups. Your choice will affect who’s responsible for fulfilling business obligations; how the IRS taxes your profits; and even whether or not outside capital can be raised.
General partnerships are among the easiest business structures to form and require minimal paperwork or registration. Partners share decision-making, profits and losses, property and financial resources among themselves while remaining personally liable for all debts or liabilities accrued within the partnership unless stated in an official partnership agreement.
The IRS taxed partnerships as pass-through entities, meaning their profits flow directly back into their owners at tax time. Partners looking to limit personal liability may wish to form a limited liability partnership (LLP), which are popular among professionals such as lawyers and doctors; additionally they can offer some tax advantages as well. Forming such an LLP requires more paperwork and costs more than creating a regular general partnership would.
Limited Liability Company (LLC)
LLCs are an excellent way for business owners looking for limited liability protection to structure their company with minimal recordkeeping requirements and flexibility.
Keep in mind that your business structure choice will have an effect on legal and tax liabilities, the amount of paperwork required each year, as well as your ability to raise outside funding. Furthermore, certain structures are easier to convert down the line than others.
Your choice of structure depends on a few key criteria, including how many owners there are and the formality of your management style. Furthermore, consider whether or not you plan to hire employees or offer equity to investors as this could alter your decision as well as state regulations regarding ownership limits and Articles of Organization filing requirements that could help avoid legal complications later.
Corporation
Entrepreneurs may find designing websites, prototyping products or taking orders exciting; however, selecting the appropriate business structure for their startup is less so. Yet this decision has long-term consequences that impact everything from IRS taxes on profits and protecting personal assets to whether personal liabilities will be protected from liability issues.
Some startups opt to incorporate as C corporations, which provides liability protection to shareholders while offering tax advantages for investors. This structure is most suitable for higher-risk businesses looking to raise capital or “go public.”
Startups should conduct careful research into all available business structures, taking into account their implications as well as long-term goals. Consulting an attorney and accountant may help entrepreneurs make an informed decision that meets their needs while leading them towards business success. Third-party providers specializing in business formation may help expedite this process and deliver documentation they require depending on their chosen structure.
