What’s the best business structure for your startup?
Foraying into an exciting space to launch your business? Choosing the right form of business entity can make a massive difference to how sound your startup will be. Every company is different and demands a different approach in understanding what business structure is needed.
It could vary depending on your industry, strategy or location.
Here are a couple of pointers to keep in mind while considering what is right for your startup:
- What is a Sole Proprietorship?
Your business, by default, is launched as a sole proprietorship and remains so unless you do something to change the business structure. This structure will imply that there is no legal difference between you or your business, and is deemed as one of the riskiest forms of business. The assets and liabilities belonging to the business will exist under your name. How does this impact you? If your business ever comes under the legal scanner or is sued, assets like savings and property under your name will be at risk, too.
Seeking business loans will be based on your credit history, and taxes for the business will be accounted as part of your personal income tax.
2. What is a corporation?
A Corporation places you legally separate from your business. The assets and liabilities belonging to the Corporation is separate from your personal assets. A Corporation, although, is not as simple as a
Sole Proprietorship.
After registration, you will need to establish a structure that includes shareholders and a Board of Directors. This is the best form of business structure for those looking to actively seek funding.
There are different types of Corporations, with the popular ones being the S Corporation and the C Corporation. The former does not require businesses to file their own tax returns. It is instead reported on the personal income tax returns, where you are taxed on your share of the company’s profits.
C Corporations have the advantage of being able to sell more than hundred shares of the company’s stock. What’s the hiccup here? Double-counting the profits. When a C Corporation gains profits, it is required to pay its taxes. After the profits trickle down to shareholders, they are required to pay an additional income tax on the profits gained.
3. What is a Limited Liability Company?
A Limited Liability Company is one that’s sandwiched between the likes of a sole proprietorship and a Corporation. In this form, there is lesser paperwork and it almost nearly restricts the involvement of your personal liability.
The best part about this structure is its flexibility in terms of taxation. You can choose to have your business taxed as an S Corporation or a C Corporation.
Bringing it all together
Although the legal paperwork and the tax jargons seem complicated, taking time to decide on what’s best for your business is of paramount importance. A well-researched understanding of what will be cost-effective and productive for your firm will go a long way in building your startup the right way.
