What is business structuring and what are its advantages for your business?
There is no doubting the fact that among all of the decisions you make when starting a business, the structure you choose or select for your enterprise will be probably the most important. This is because it determines the running of your business and helps you understand issues relating to tax payment. This decision equally has an impact on the paperwork required for your business, your ability to raise capital, and your personal liability.
Sole proprietorship, partnership, and corporation are some of the most common business structures. Others include S corporation, limited liability company (LLC), and the limited liability partnership (LLP). Owing to the fact that each business form comes with different consequences (for instance, tax consequences), you have to select wisely and choose the type that most closely matches your business’s needs. You can reorganize your venture as partnership or other entities if you started as a sole proprietor and decided to change in the long run. Understanding the most common types of business structure and their advantages is essential especially for someone that is thinking about venturing into business but is clueless on the best kind of structure suited to meet his demands.
This is the simplest business structure to set up. Its name is self-explanatory; it is the most popular business structure for many startups. The owner gets to operate the establishment independent of interference from another party. Also, effort required when doing business reports is less when compared to other business structure because the owner is answerable to him/her self when making all the financial decisions.
As a sole proprietor, you also get to determine the name your enterprise will use for operation. Most times, the business name is not separate from the name of the owner for easy identification. All debts and liabilities which the business might incur in the long run are solely borne by the owner. Likewise, the sole proprietor enjoys all profit made in the day to day running of the business. There are no other parties to share profits with which give a sole proprietor the avenue to spend company funds in any manner he or she wishes. Formalities to adhere to are few, and regulations from the federal, state, and local government are less compared to other forms of business. Not to forget, a sole proprietor cannot sell shares to raise capital for the business. Little wonder a lot of people choose this structure.
Advantages of sole proprietorship
- Easy to establish and maintain
- The sole proprietor is independent
- All profits attached goes to the owner
- Owner spends money without questioning
- There is no conflict of interest.
A business structure owned and operated by several individuals is known as partnership. For this business type, owners share the task of managing and sharing ideas with each other. However, partners do not file income taxes as a business entity which means each of them are required to report their share of business loss and profits as personal income tax return. This type of structure comes in two forms: general partnerships and limited partnerships.
For general partnerships, everybody involved manage the business and assume responsibility for the partnership’s debts and other obligations. On the other hand, limited partnership involves both general and limited partners. General partners in this scenario own and operate the business and equally assume liability for the partnership. While limited partners on the other hand serve as investors only, they do not have a hand in the control of the company and do not assume liabilities like general partners.
Unless there will be numerous passive investors, limited partnerships are not the best for a new venture because of the administrative complexities involved. Having two or more investors willing to fully trade with you as general partners is best. However, personal liability is a major concern if you structure your business in general partnerships lines, just like sole proprietors, general partners are responsible for the partnership’s obligations and debts.
Advantages of partnership
- Less expensive to operate
- All partners when it is general in nature bears the risks associated with the business together
- Shared responsibility which reduces the burden of managing the enterprise.
- The financial commitment is shared
This business structure is a legal entity independent and separate from owners with required compliance for regulations attached. This form of business is complex in nature and more expensive to operate compared to other business structures. An investor which decides to incorporate enjoys liability protection; this is probably the biggest benefit a business owner stands to gain from incorporating.
A corporation’s debt is not considered that of its members, you do not put your personal assets at risk if you organize your business on corporation lines. Also, a corporation’s profits can be retained without an owner paying tax on them.
A corporation finds it easy to raise money when compared to other business structures this is because a corporation can sell stocks to raise funds. The death of a shareholder does not signal the end of a corporation as operations continue indefinitely. Being disabled or selling shares by one shareholder would not equally end the existence of the corporation. State laws are used in the establishment of corporate structures; the guidance of an attorney will probably be needed in setting up a corporation. Due to the complex rules and regulations guiding a corporation, accounting and tax related services are needed much more when compared to other business structures. It is necessary to note that the owners of a corporation pay double tax on earnings. Corporations are equally subject to corporate income tax at the federal and state levels while distributed earnings to shareholders in the form of dividends are individually taxed on personal income tax returns.
Advantages of a corporation
- Personal assets of shareholders are protected
- Easy to raise capital
- Corporate tax treatment
- Shared profit
- Less risk burden
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