Starting a small business is not only about working on a business idea! There are so many legal aspects and technicalities that you have to keep in mind to start a small business properly. A business structure is essential to establish the business. Have you thought of the correct entity or business structure yet? Without the correct selection, it is impossible to upscale your business and make the most of the future prospects.
Common business structures
The options for business structures are limited, for which many people think it is easy to pick any one option. But it is not so easy in the practicalities. You have to understand each business entity, the pros and cons, the essentialities for your business and many more! Do not select any business structure without checking the advantages of the particular decision for your business type and risks. If needed, you can consult with experts in the matter and get the best assistance in decision-making.
Different types of entities
Before you pick the business structure, know the basics. What are the different types of business entities or structures that you must know about? Are you aware of the crucial factors that play a role in choosing the best? These are questions that you must be able to answer while thinking of establishing a small business. Read along to understand better.
- Sole proprietorship – Sole-prop is the most straightforward business structure to understand with the least complexities. Here, the sole proprietor runs the unincorporated business. Most small business owners prefer choosing this option for their business entity. It is simple and most profitable. As no external agents play a role in revenue distribution, decision-making, etc., it becomes an easy option for most business owners. The owner is responsible for the business losses, liabilities and debts as well.
- Partnership – Multiple ownership or partnership is when there is more than one business owner. Each person in the partnership business contributes their money and effort for running the business. Profits, losses, debts and liabilities get equally shared between the partners in the enterprise. The complexities in a partnership business are more than sole proprietorship but manageable with proper follow-ups. There are three business partnership types – General, Limited and Joint ventures.
- Limited liability corporation – An LLC business model is a hybrid structure of corporation and partnership. The features are similar to corporation bodies in an LLC. In contrast, the tax structuring and operational flexibility are similar to a partnership business. Hence, it is a hybrid model. The owners are call numbers in the LLC, and there can be more than one owner in the business. LLCs do not get taxed as distinct business entities, and the profit gets passed on to the owners of the business. If you wish to register the small business as an LLC, it is best to connect to a legal expert and clarify the doubts.
- Corporation – In a corporation, the business owners do not have any personal liability. It is a legal business structure and the most complex one. The different types of corporations are – C-corporation, B-corporation and S-corporation. In a business corporation, there are several legal regulations related to profit distribution, tax structures, losses and debts. Before registering the business as a corporation, it is vital to understand if it is beneficial for your business objectives and operation.
Factors that play a role– You must recognize the different crucial aspects of the business and decide the formal or informal business structure. The formal structures are – LLC and Corporation. The informal business structures include – Partnerships and Sole proprietorship.
Usually, businesses with low risk pick the informal structures and avoid the complexities. In contrast, businesses with high scalability aspects go for the formal structures. It allows the business to gain credibility, risk management and tax benefits. You can choose to register the business as an LLC or corporation if –
- It has a huge customer base
- The risks are more with liability losses
- It requires unique tax solutions and options
Besides these, there are other factors playing vital roles in the decision making.
Numbers of owners in the business
If you are the only one responsible for the business operations, why complicate the matter by choosing partnership or other formal business structures? However, if you want to share the ownership, there are a few considerations. Review the profit and loss distribution aspects alongside tax benefits before deciding on a suitable business structure.
Liability and associated business risks
If the business is risky and has a high liability risk, review the prospects of LLC and corporations. As an owner, you need to protect your assets and reduce the chances of risk in the business. With corporations and LLCs, you can manage the requirements without worries.
Business control and decision-making
If you wish to keep control of the business, go for informal business structures. A sole proprietorship is the best choice as it does not involve external factors. You are responsible for every decision and business operation. Even with partnership, you can carefully divide the decision-making aspects within multiple owners.
Credibility of business
LLCs and corporations score high in terms of providing business credibility and scalability. The data and information of the business and essential aspects are public and thus, brings authenticity. As a result, it gets easy to get third-party investors on board and earn their reliance.
Understand the pros and cons
Review the advantages and disadvantages carefully, so you do not make a wrong decision. There are disadvantages to every business structure and complexities. Every business requires unique solutions and entity support to run optimally. So, take a prudent call based on the business type you are concerned with. Register your small business name under the best structure that suits your requirements and supports business growth.
Connect to an expert to resolve the worries
Legal and business experts are the best ones to guide you on the matter. If you have not made a conclusion yet, it is time to seek expert guidance! Take the decision wisely by consulting with the consultants and reviewing if the decision will be beneficial in the long run. You can reach out to PlanCover for guidance in helping mitigate various business risks. The final solutioning of various business insurance policies depends on the actual scope of business description and also the type of incorporation of the business.