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Basics of Business Structure: Choosing the Right Entity for Your Biz

Basics of Business Structure

So you’re starting your own business and contemplating which business structure to give it. One way to make this determination is to think about the relationship you want to have with your business partners, investors, employees, vendors and, perhaps most importantly, customers (or clients). Here are some basics to help you make that decision, depending on your relationship preference and how you want to be perceived by customers.

“I want to be solely in charge of all business decisions.”

If you want to be the only boss, with nobody else to answer to, then you should consider a sole proprietorship or a single-member limited liability company (LLC). Both of these structures allow you to make all business decisions completely on your own. While you might seek the advice or counsel of other colleagues or professional service providers (like lawyers or accountants), the buck always stops with you.

From a customer standpoint, the advantage of these two business structures is that customers deal only with you. If customers like you and have confidence in your work, they have a certain comfort level with you that they might not have with a partnership or nameless company. You can build a one-on-one business relationship that may carry on for years.

Note: While it takes longer to set up, a single-member LLC offers you better protection from legal liability than a sole proprietorship does, as it separates your business activities from your personal assets.

“I want to have at least one partner to share in the business decision-making.”

Having a partner or partners can be a great way to share business responsibilities and decision-making. If you want to join with others in business, you might consider either a simple partnership or a multi-member LLC. A simple partnership requires only a partnership agreement to get up and running. A multi-member LLC must file with the state in which the business operates. Each business structure requires slightly different tax considerations.

Customers see certain advantages when dealing with a partnership or multi-member LLC. If one partner is on vacation or otherwise unavailable, another partner can step in and pick up the slack. Some customers may also feel that two heads are better than one, and may see a partnership arrangement as providing better products or services than a single business person can.

Note: Just like a single-member LLC, a multi-member LLC offers you better protection from legal liability than a simple partnership does.

“I want to be part of a larger group of people united in business.”

If you have big dreams for your business and can envision it growing well beyond the effort and expertise you alone or you and a few partners can provide, then you should consider incorporating your business. Structuring your business as a C corporation or S corporation allows you to join together with others to offer products or services in quantities you couldn’t otherwise provide, often with superior quality as well. Corporations get the expertise of a board of directors to help make decisions based on industry knowledge and experience. They can also tap into investors that help them develop the business exponentially.

Customers tend to put a high level of trust in corporations because government scrutiny of them is fairly rigorous. Being profitable is another sign to customers that a business is worth their attention, so a thriving corporation draws on customers that other, smaller business may not. Brand name recognition counts for a lot, too.

Note: S corporations are limited to 100 investors, while investors in C corporations are unlimited.

A knowledgeable accountant can help you in making the business structure decision that’s best for your business. Consider hiring an accountant early in your business planning process.

Published: August 21, 2018

Source: 1800 Accountant

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