Choosing the right structure of your business can be daunting because there are many options available to you. Each one of them carrying specific legal, operational, and financial implications.
You need to make sure you are making the right decision for your business. So, here are the factors you should consider to narrow your choices down to the right one.
1. The type of business you are planning to have
Every industry is made up of numerous small business. But each one of those businesses is unique in their terms of purpose and way of operating. So, you must frame your business precisely before you launch it. After that, it is much simpler to select the right structure.
So, are you planning to have a retail outlet, a consulting agency or provide an online service? Some company structures go naturally with certain types of work, so this step could make your decision much easier.
2. Identify the expected size of the company
You should identify how many individuals will be working in your company. For example, if just one person is enough to handle all of the operations, then a sole proprietorship could be the structure you will go for. To add a bit of formality to the business, you could try becoming a single-member LLC. On the other hand, a business where at least a few employees have to be included could function better as C corporation, S corporation, or perhaps as a multi-member LLC. Of course, the number of employees can change in time but you need to make your decision based on the current facts.
3. Personal Liability
Another important factor is the level of liability protection that each business structure offers. There are various levels of it, depending on whether it’s a corporation, limited partnership, LLC, or limited liability partnership.
In case of a corporation or LLC, it’s only possible to sue the entity, not the actual owners or officers of the business in question. In case of a limited partnership, limited partners have personal liability for the debts made by the company. However, their liability only goes as high as the amount each one of them invested in the business. On the other hand, general partners have unlimited personal liability. That can be limited by creating a corporation or having LLC as the general partner.
In the case of a limited liability partnership, any of the partners is not personally liable for the debt made by the business.
4. Business taxes
Beside personal liability to a certain extent, your business structure will determine which taxes your business have to pay. Being well-prepared and informed for future taxes is of crucial importance. For example, Australia has been seeing a rise in new small business in the last 5 years. However, there is also an increasing number of businesses that fail in the first year or two. This is why highly responsible and cautious business owners turn to top accounting firms in Sydney and other major cities for professional advice and let them take care of their taxes and other financial and bookkeeping obligations.
Bear in mind the fact that, if you choose a sole proprietorship as your business structure due to it being the simplest structure, it will come at a price. Even though there are fewer tax obligations, this type of structure is taxed at the personal level. In other words, you will personally be responsible for any business losses.
In the case of an LLC, you will have your personal and business liabilities separated. However, your taxes will be higher and possibly a bit less complicated to follow, as you will also have to make a distinction between a single-member and a multi-member LLC.
6. Projected profits and revenue
The money your small business can make could have a huge effect on your choice of business structure. If your business is more of a side job than the source of your main profit, then you may not have to choose a formal business structure. However, if you want to run a business that should support you fully in financial terms, then you should consider LLC or corporate options.
7. Financial arrangement
Tax deductions, expenses, and fees only apply to specific business structures. This is why it is necessary for you to take a step back and look at the bigger picture here. The expenses inevitable if you are a sporting goods retailer will be much different than the expenses of a consulting agency, for example. These unique expenses also affect the IRS tax-saving options. So, when you identify the specific needs of your company/business, it will be easier to adopt the right business structure – the one that matches those specific needs. By choosing the right one, you will be able to use more deduction of credits, which you can than put to a good use afterwards. You would also be able to use unique strategies characteristic only for a specific business structure, which would consequently lead to a higher income in the long run.
8. Flexibility and future needs
You should also consider your future business plan when choosing the right business structure. In other words, you need to envision where your business is heading to in the years to come. For example, if you opt for a trust, you won’t be able to expand it further, as there will be certain legal penalties to your actions. So, if you have an expansion in mind at a certain point in the future, then you should consider other options.
9. Continuity of existence
You also need to consider how you want your business to come to an end one day. In case you want to run a business that can be terminated at any moment YOU want it, then choosing the sole trader option is the best one. But if you want your family’s future to be secured, then you should opt for a business structure that won’t be terminated in case you become in any way incapable of running it.
Take your time and consider all of your options. It may seem like the very beginning of your business but it will actually determine a lot of other factors later on.