What is a Business Structure?
There are a few common options including sole proprietorship, partnerships and corporations. Each offers various levels of control and protections against legal action brought against the business.
Sole Proprietorship
This is the simplest way to start a business, but there are risks involved with running a business as a sole proprietorship.
The biggest risk is that should anyone bring a lawsuit against your business you would be personally responsible.
That means your personal savings, even your home, could be at risk should a judgment be won against your business.
Partnerships
A partnership is similar to a sole proprietorship in that the financial responsibility is tied in with the owner’s personal finances.
The difference is that with a sole proprietorship there is only one owner. A partnership has two or more owners.
Corporations
By running your business as a corporation, the business is its own entity, separate from the owner or owners.
This means that owner’s personal finances would not be at risk in the event of legal action brought against the business. However, owners are still liable for actions taken by the business.
See your business law professional for more details. Corporations are more expensive to set up initially, but this is something you should consider as it is worth the investment.
Business Credit
For businesses applying for business credit, being structured as a corporation will give you an advantage as opposed to being a sole proprietorship.
That being said, if the business has not yet established a credit history separate from its owners, then the personal credit history of the owner or owners will still be considered by the bank when making a decision.
Stocks for Capital
Another advantage of running your business as a corporation is that you have the option of selling stock in your business in order to raise capital.
Keep in mind, however, that once your business goes public, there will be an additional set of rules and regulations that you must follow.
Tax Savings
Because each business is different, and there are so many variables involved, it is not possible to say which business structure will save you the most come tax time.
To make such a determination, you should speak with your accountant or tax professional who can consider the nuances of your business when advising you on such matters.
Just keep in mind that it WILL make a difference, so it is important to understand what impact your business structure will have on your taxes.
There is no one business structure that is right for every business. There are many factors to consider when making the decision of how you choose to run your business.
Upfront costs, control, and decision making as well as personal liability are just some of the factors to consider.
Whichever structure you choose, be sure to learn the rules and regulations regarding that structure. It is important to be in line with all the regulations of your chosen business structure.
