Choosing the Best Structure for Your Business — Four Questions to Ask Yourself
All business entities are not created equal. Deciding how to structure a company can be a daunting task for small business owners. The decision sets the rules of the game; it determines how much control is retained by the original owners, which owners are personally liable for the company’s actions, how profits and losses will be distributed to owners, how those distributions will be taxed, and whether ownership can be transferred or terminated.
To make sure you’re choosing the best structure for your business, take a few minutes to consider the four questions below.
How Do You Feel About Sharing Control?
As a general rule, ownership equals control. If you own 100% of a business, you have absolute control over it. In a general partnership, owners share control of the business; any major decisions must be made unanimously.
In an LLP or LLC, owners are only required to meet a state-specified majority voting percentage to move forward with major business decisions.
The owners of a corporation, on the other hand, share control with hundreds, or sometimes thousands of stockholders, most of whom they have never have met.
How Much Money Will the Company Need?
Sole-proprietorships, partnerships, and LLCs are limited to the money their owners have, plus whatever the bank will loan them.
Corporations have more access to capital than other forms of business, mostly through the sale of company stock. C-corps have two significant advantages over S-corps. S-corps are limited to 100 domestic shareholders, all of whom must be issued the same class of stock. Since C-corps aren’t bound by those limitations, they have access to the largest pool of potential investors.
Nothing good comes easy. In exchange for a corporation’s easy access to capital, its owners must be willing to give up some of their control. If you’re willing to make that sacrifice, incorporating your business can limit your potential liability while increasing your ability to raise money when needed.
How Much of Your Time Can You Devote to Administrative Aspects of the Business?
Sole proprietorships are the simplest and cheapest option to get off the ground, since they don’t require any paperwork to start.
In contrast, corporations are subject to a dizzying array of rules and regulatory oversight. Making the decision to operate as an S corp or C corp means at least one owner must spend a significant amount of time monitoring the company’s compliance with applicable legal and regulatory requirements.
Staying on top of the administrative mountain that comes with a public corporation is both costly and time-consuming, which makes it unsuitable for most small business owners.
How Much Do You Trust the Other Owners?
In a sole-proprietorship and a partnership, owners are personally responsible for debts and obligations of the business. Neither entity provides any personal liability protection whatsoever. This can present problems in a general partnership, when one partner’s error in judgement has the potential to cost the other partner everything they own.
For S-corps and C-corps, trust isn’t as big of an issue. On the opposite end of the spectrum, owners of a corporation have more protection from being held liable for the company’s actions. Since a corporation is its own legal entity, it can be sued separately from its owners.
Key Takeaways
Once you’ve taken the time to consider what your financial needs are, how much time you can commit to the business, and how much control over it you’re willing to give up, you will be in a much better position to pick the best option for you and your business.
To make sure you’ve covered all your bases, don’t forget to check with a qualified attorney and CPA before making anything official.
