Starting a new business is an exciting but stressful time filled with important decisions. One thing you will have to do is choose a business structure. There are many business structures to choose from, and this decision requires careful consideration. Read on for six important considerations when choosing a business structure.
Understand Common Business Structures
The most common structures for new businesses are:
- Sole Proprietorship: You will be considered a sole proprietorship if you are performing business activities but have not registered as any other type of business. A sole proprietorship is the most straightforward business structure, but it leaves your personal assets at risk when there are company debts or obligations.
- Partnership: As the name implies, this structure enables two or more individuals to jointly own a business. You can structure a partnership to give more control to one partner, commonly called a general partner, or you can spread control evenly across partners.
- Limited Liability Company (LLC): An LLC is a preferred business structure for protecting personal assets from company liability.
- Corporation: A corporation is a legal entity that is separate from its owners but requires more record keeping, reporting, and operational organization. If you intend to have shareholders, you will need to structure your business as a corporation.
- Nonprofit Corporation: If your business will perform educational, charity, religious, literary, or scientific work, it might qualify as a nonprofit. Forming a nonprofit requires filing with the IRS.
Decide on Control
If you want to have full control over the business and business decisions, a sole proprietorship, LLC, or partnership with clearly-detailed rights and responsibilities is the best path. Corporations will have a board of directors that makes major decisions, and it becomes difficult to control decisions as the business grows.
Be Informed About Liability
One important consideration as you choose a business structure is whether your personal assets will be at risk if your business ends up in financial trouble. Your personal assets are at risk if you choose to set your business up as a sole proprietorship or a limited liability partnership.
While the remaining business structures require slightly more work to organize, they will keep your personal assets like your home and car safe if your business goes bankrupt. This is a crucial factor to consider when planning your business formation.
Follow Filing Requirements
Filing requirements for business structures vary from state to state, but some are certainly more onerous than others. In most states, a sole proprietorship does not require the owner to file any paperwork.
A partnership will require the partners to enter into a business partnership agreement. This document will detail the partners’ agreement on business structure, responsibilities, capital contribution, ownership interest, partnership property, and the process for a partner to exit the partnership and dissolve the partnership.
To establish an LLC, you must choose a business name, file articles of organization with the state, and create an operating agreement. To form a corporation, you will need to follow similar steps to an LLC but must also appoint a board of directors, select a registered agent, create corporation bylaws, create a corporate record book, and issue stock.
Some industries have industry-specific filing requirements or permit requirements.
Prepare for Investment
You might know upfront that you need or want to secure outside funding for your business, or you might simply hope to get outside funding in the future. Either way, if outside funding is a part of your business plan, this is an important factor when selecting a business structure.
Corporations have more options for securing outside funding because a corporation can sell stock. Sole proprietorships and LLCs need to use their personal accounts to shore up funding.
Think to the Future
As you choose a business structure, you are likely focused on the goals and obstacles immediately in front of you. It is important, however, to choose a structure that gives you the flexibility you need as your business grows and changes. Common reasons for changing a business structure are:
- Increasing the number of employees
- Protecting personal assets
- Enabling outside investments
- Securing bank financing
It is more difficult to make changes to a partnership or corporation because a change requires alignment across multiple people or a board of directors. Additionally, an LLC might automatically dissolve upon the death or withdrawal of a member. The process for changing your business structure varies from state to state.
Choosing a business structure is an important decision with a variety of factors at play. An experienced business lawyer will work with you to review your business plan, assess your goal, and determine the structure that is the best fit for your business. Your attorney will also make sure that you file all the required paperwork and secure any permits required to operate your business. Contact an experienced business formation lawyer today to discuss the future of your business.