A business structure defines the ownership model and how you manage the daily activities of your business. Your business’s success may depend on the type of structure you use. It determines the time it’ll take before you get your trading license, your liabilities, and your tax obligations. In other words, your business structure is the foundation of your business.
You could use various business forms, but it’ll be best to consider your investment needs, liabilities, flexibility, nature of business, and control issues. You also need to know how each structure operates to select the best one for your business.
Here’s a comprehensive guide to startup business structure to help you select the best one:
Types Of Business Structures
You have four main business structures to choose from for your startup. They include:
- Limited Liability Company
A limited liability company, or an LLC, is a pass-through business form that keeps your personal property separate from the business assets. It combines the best features of a sole proprietorship, corporations, and partnerships.
You can have as many members as you want in your LLC because it doesn’t limit you to a certain number. However, there are differing tax obligations. The income and expenses for a single-member LLC, for example, are reported on the owner’s personal tax return. On the other hand, a multi-member LLC files a Form 1065. Don’t worry though, there are so many great tools to help estimate your taxes.
The formation of an LLC is also simple and involves just a few steps, and the best part about it is you can create LLC online with the help of third-party service providers. The basic steps involved when forming one include the following:
- Naming Your LLC: There are a few rules about your choice of names. For one, the name you choose must be available in the state where you intend to start it. Secondly, you must include ‘limited liability company’, L.L.C, or LLC in your name. Lastly, the URL of the name you choose has to be available.
- Appointing A Registered Agent: The next thing you need to do is hire a registered agent to help you with the paperwork. They must send and receive official paperwork from the state on your behalf.
- Filing Articles Of Organization: You must file articles of organization for your LLC as required by the law.
- Creating An Operating Agreement: Another critical step when forming an LLC is creating an Operating Agreement. It’s a legal document outlining your LLC’s operating procedures and ownership. It helps in minimizing conflicts and outlines what happens in case of dissolution.
- Getting EIN: Employer Identification Number (EIN) is crucial for all businesses because it identifies your business. Also, it’s the number you use when you want to pay your taxes, open bank accounts, or hire employees.
You’ll also need to get your business licenses and permits before operation. Therefore, it’s essential to consider all these before selecting LLC as your business structure.
- Partnership
A partnership is an official agreement between two or more individuals who agree to start, manage, and run a business. Unlike LLCs, partnerships have a limited number of members depending on the type of your partnership agreement. The types include:
- General Partnership: A GP is an agreement between two or more people to form and run a business. It has a minimum of two members and a maximum of 20 members. However, a general partnership doesn’t protect its members against liabilities. They’re responsible for business debts.
- Limited Partnership: Unlike a general liability partnership, a limited partnership protects the partners against business debts by limiting their liabilities to the amount of capital they invest into the business. However, limited partners have no control over the business. A limited partnership has a minimum of two members, but there’s no maximum limit to the number of members.
To form a successful business partnership, you must be patient and do extensive research. A partnership also involves a lot of transparency, accountability, and patience. The formation process is simple and easy. It includes:
- Selecting Partners: You must choose your partners carefully because they influence the business’s success. It’d be best to consider someone with whom you share views and goals. Also, consider their credibility, skill set, and business world knowledge.
- Choose The Type Of Partnership: The second crucial step is to determine the type of partnership you want to run. It could be a limited liability partnership or a general liability partnership.
- Name Your Partnership: The name you choose for your partnership may incorporate your name and your partner’s name.
- Register Your Business: You must register your business with your state’s secretary. Remember to register all states your partners have business in.
- Obtain EIN: Similar to any other business, you must get an Employer Identification number.
- Create A Partnership Agreement: It’s a legal contract outlining all partners’ roles, profit and loss sharing ratio, and liabilities.
Partnerships are also easy to form and have few legal formalities. However, ensure you choose your partners wisely. The growth of your startup will depend on it.
- Corporation
A corporation is a profit-making organization owned by shareholders. It stands separate from its owners, has rights just like its owners, and is sued as an individual. It’s more complex than the other structures with detailed and stringent tax requirements.
There are three types of corporations with distinct characteristics. They include:
- S Corporation: Unlike in C corps, all deductions, income, credits, and losses pass to the shareholder for taxation. There’s no double taxation.
- B Corporation: This is a profit-making corporation. It’s the best option for you if your company has a committed social mission, is accountable, transparent, and considers employees’ benefits.
- C Corporation: in this structure, shareholders and the company are taxed separately on generated income and profits, creating double taxation.
As mentioned, corporations have a complex legal structure. However, it follows some common formation procedures as the LLC. Its unique formation procedure includes:
- Selecting directors, unlike LLCs, which can be member-managed
- Planning shareholder meetings
- Holding an organizational meeting
Like LLCs, all legal paperwork involved in the formation process goes through a registered agent. Only consider forming a corporation if you’re ready to undergo the rigid protocols and formalities.
- Sole Proprietorship
A sole proprietorship is the simplest business structure of all. It only needs a single individual who pays personal tax to run and operate it. However, it doesn’t protect owners from business liabilities. They’re held solely responsible for the business debts and liabilities.
A sole proprietorship doesn’t require as many legal documents and paperwork as other business structures. You only need the required licenses and work permits to operate. Of course, all this will differ depending on the nature of the business and the location of your business.
Conclusion
Choosing a business structure is one of the most important decisions you must make as a business owner. You must consider the different business forms and the nature and size of your business before making a decision. Luckily, this article introduces you to the various structures and their formation process. However, explore more research materials to get more insight into business structures and how to select one that meets your business goals.