If you’re tired of working for others, starting your business is a practical choice to gain financial freedom. Whether you plan to enter manufacturing, food, or e-commerce, venturing into business is exciting. While it helps you pursue your hopes and passion, it can also be daunting and confusing for newbie entrepreneurs.

Meanwhile, a formal business degree or training is an advantage but optional when starting a business. However, preparing yourself to make difficult decisions can help your company thrive. Choosing the proper structure is one of the most critical choices at the beginning of your journey as a business owner.

In this article, you’ll learn the basics of a business structure and how to choose the suitable one for your business.

The Right Business Structure For Your Company

A business structure is a commercial organization’s legal structure. It helps determine the framework for your business, including raising capital, taxes, personal liability, and the paperwork to file.

Considering which business structure fits your company is essential for growth. Partnership, corporation, or starting an LLC can have several implications for your overall finances and long-term plan. As such, choosing a suitable one can affect the growth and profitability of your business.

Here are some valuable tips and factors to help you select the proper business structure for your needs:

1. Know Your Options

First off, you need to understand the available options. Business owners can choose from four main business structures: sole proprietorship, partnership, LLC, and corporation.

• Sole Proprietorship

It’s the most straightforward structure available. You can operate the company under a business name or your name. It’s the preferred option for those starting in business, offering fewer worries and a hassle-free start.

Setting a sole proprietorship is relatively easy and inexpensive. In most cases, you don’t need to file paperwork for setting up another commercial entity since your business already exists. However, being a sole trader comes with several issues.

Significantly, there’s no legal separation between your personal finances and your business’s assets. Being a sole trader, you can also expect rejection for funding. Most banks and financial institutions are reluctant to lend money to sole proprietors due to their limited economic history.

• Partnership

Partnership structure is a practical choice if you start a business with a friend, relative, or family member. A partnership is easy to form and has better growth potential than a sole proprietorship. With more potential, expect it to be more expensive to set up. Also, since it has multiple owners, you’ll need a lawyer to review the partnership agreement.

There are two types of partnership: limited and general partnership. With a limited partnership, only one partner controls the business operations while the others only contribute and receive parts of the profits. Meanwhile, a general partnership equally shares operation control, contribution, and profit among owners.

A partnership can operate as a sole proprietorship without legal separation between owners and company assets. However, depending on the liability structure and funding preferences, you can choose a limited liability partnership to separate these two.

• Limited Liability Company (LLC)

For small-time business owners who want to take their company to the next level, LLC is the most preferred option. This business structure offers no limit on the number of shareholders. Hence, it’s the perfect option if you want to open your business to investors. The most significant benefit is that it provides the same liability protection as corporations.

In addition, it allows profits to pass through to the owners—preventing double taxation. Remember that added protection and benefit come with more difficulties during formation. However, your challenges aren’t on the same scale as setting up a corporation. Ideally, you can consult a legal professional to help you set up an LLC.

• Corporation

The most formal type of business structure, a corporation offers the most limited liability and better potential to increase your capital. This structure is often reserved for larger companies with numerous employees and investors since they are complicated to set up. Plus, did you know that a corporation may incur double taxation?

Meanwhile, you can differentiate a corporation because it has a more complex legal structure, tax requirements, and shareholders. If you’re considering this option, know that it’s further divided into three categories:

• C-Corp
• S Corporation
• B Corporation

Each type has its pros and cons. For instance—C and B corporations incur double taxation, whereas S corporations don’t.

2. Legal Protection

Separating your company assets from your personal finances is beneficial if your business carries significant liability. This way, your personal finances can remain safe against devastating issues arising from commercial activities.

On the other hand, the more protection you want, the more formal structure you should choose. Limited liability companies and corporations offer liability protection. However, the former is more suitable for small businesses, while the latter is best for larger companies.

3. Think Taxes

Choosing a suitable business structure can also be beneficial in terms of taxes. Sole proprietorships, partnerships, LLCs, and S-corporations are pass-through entities, meaning that profits are taxed when paid to the owners. Other types may also experience double taxation, which means the company and shareholder payouts are taxed.

• Consider Company Type And Number Of Owners

Do you plan to become a public corporation in the future? In this case, a C-corporation is the best structure to set up. Otherwise, you’ll need to choose the type of structure based on the number of owners. Sole proprietorships can only have one business owner, while the rest allow multiple owners.

Takeaway

Choosing the proper legal structure can take time and effort for small enterprises. However, it’s an essential part of running a business. Whether you’ve just registered your startup or want to take your company to the next level, choosing the perfect option can help you better protect your business.

Hopefully, this post has helped you decide the best structure for your company. Always remember that you can always change your current business structure. Especially if you think another type would make more sense for your company.

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