But one of their most crucial decisions relates to their business structure because the structure they choose will have ramifications for years to come.
Business structure refers to a company’s legal categorization as a sole proprietorship, partnership, limited liability company (LLC), or corporation. Each structure has advantages and disadvantages, and a new business owner who fails to understand the pros and cons of each structure risks making costly mistakes.
Perhaps the most well-known impact is on a company’s taxation. For example, business owners with sole proprietorships, partnerships, and LLCs generally file taxes through their personal returns on a tax document referred to as a Schedule C. It’s simpler but could sometimes result in a higher tax rate. Corporate tax returns allow for additional write-offs that save many businesses money despite their complexities.
Liability is another important consideration. Every new business hopes to avoid litigation, but no one knows what the future holds. People who operate as a sole proprietorship or partnership put their personal assets on the line and could lose them to business debt or other legal problems. LLCs and corporations usually ensure you won’t lose your house or savings accounts if the business goes south, and if done correctly, insulate you from personal liability.
A company’s business structure also affects its funding. For example, corporations can issue stock shares, which makes the company more attractive to investors seeking equity in exchange for a cash infusion. Other business structures lack this ability. But there are multiple sub-types of corporations, and selecting the right one can have as many consequences as choosing your primary business structure.
It is possible to change a business structure, and many individuals ultimately do change their structure. Walmart began as a sole proprietorship, while Microsoft started as a partnership. Changing your business structure can be confusing and expensive for the principals of the business. That’s why carefully considering your options and selecting the structure that will serve you best for the foreseeable future is essential.
The business attorneys at Douglass & Runger have experience forming all business structure types. They can walk you through the advantages and disadvantages of each and help your company gain legal recognition to the letter of the law.
