One of the most important decisions you will make as a business owner is the type of structure you will adopt. Although this is not an exciting task, it will determine many things, from your taxes to your personal liability.
Therefore, these are some things you should consider when choosing your business structure.
Corporations need boards of directors to protect their shareholder interests, while partnerships, LLCs and sole proprietorships do not require boards. However, partnerships with multiple investors can become cumbersome. Operating agreements govern LLCs. These documents dictate company management and the owners’ and managers’ roles.
No one likes to do or pay taxes, and business taxes have complications. Therefore, you have two options. You can use a pass-through entity, such as a sole proprietorship, partnership or LLC, where all business profits “pass through” to your personal taxes, or you can file separate business taxes through a c corporation structure, which can result in double taxation after profit distributions.
Corporations have complex paperwork requirements, especially with multiple investors. They often require professionals, such as an attorney and accountant, to set up and properly manage. Other business structures typically have a small amount of simple paperwork initially and once per year after the initial filing.
Personal risk tolerance
Risk tolerance can be tricky. Every business loan that you personally sign or provide personal collateral for places your personal assets in danger. However, lawsuits and loans backed by business assets do not have to impact your personal. Sole proprietorships place your personal finances in jeopardy no matter what, but you can insulate yourself through an LLC or corporation. Partnership risk depends on your partnership structure.
Do some research before you create your business. Then adopt the structure that best fits your needs and long-term goals.