How to Choose a Business Structure

Sep 1, 2020
Business Structure Corporations Financial Planning LLCs Small Business

One of the most important (and earliest) decisions you will make regarding your business is the structure. This is a big decision since it will have a huge impact on the amount of personal liability you take on, the amount of paperwork you are legally required to do and the amount you pay in taxes.

There is no one right solution for all businesses. No business formation is universally better than any other: it all depends on your needs.

What if I make a mistake? Is it possible to change structures later?

It is possible to change structures if, down the road, you discover that a different formation will suit your business better. However, it is best to initially choose a formation that will work for at least the first few years of your business. While it is possible to change structures, this is a complicated process that can be expensive and time-consuming. It is best to make the right decision the first time.

What types of business entities are there?

There are three major business structures to choose from. Some of them have sub-formations, as well. The first and most common way to organize a business is a sole proprietorship. This form is very simple, which is why it is so common, but only one person can be the owner of a sole proprietorship. Plus, sole proprietors take on full financial liabilities for the business. This means that if the business goes bankrupt, creditors can go after your personal assets.

The second option is a partnership. This organization form requires at least two people (unless it is a limited liability company), though it may involve more. One of the advantages to this organization is that the members of the partnership report profits and losses on their individual income tax returns. However, every member of the partnership is liable for the business’ financial obligations, the same as a sole proprietorship. The exception to this liability is, again, if the partnership is a limited liability company.

The third option is a corporation. A corporation is an entity created and treated separately from the founders. With a corporation, this legal entity is responsible for the actions of the business, not the individuals: a major benefit. The two major subtypes of corporation are C and S. However, with corporations the record-keeping is very extensive, and they are the most expensive formation of business to form. Many cite double-taxation as an additional negative to corporations, but an S corporation helps avoid this.

Keep your goals in mind

Taxation and liability are not the only things you should think about when deciding on a business formation. The formality of your management structure is also important. This can be particularly salient if you will have multiple owners. For instance, the organization of a basic partnership (excluding LLCs) focuses on how the parties divide profits and what happens if one party dies, retires, or is otherwise unable to continue on with the business. S and C corporations must, by law, have a board of directors. LLCs usually have an operating agreement.

Administrative complexity is important, too. Corporations will almost certainly require a lawyer and an accountant to help you with the record-keeping, at minimum. Noncorporations require far less administrative overhead. However, utilizing a corporate type of structure (C or S Corp, or LLC)  may allow you to add and ultimately expense benefits such as Health Insurance, Retirement Benefits, Life Insurance and Disability Benefits, which can often offset the cost of the administrative expenses and provide a competitive environment that helps retain key employees.

Deciding which business formation is right for you can be a difficult task. Our business formation experts at AmeriEstate can help guide you to the best choice for your business.

Contact AmeriEstate today to get started.