When you are evaluating which structure to choose, it is important to think through these three … [+]
By: Rhett Buttle
Choosing the right business structure is a critical aspect of successful entrepreneurship. A recent piece in Forbes focused on the four different types of business structures. However, there are certain criteria to weigh in selecting the right one and it is important to remember that the structure you start with may not be the one you have two or five years from now as your business evolves.
For now, it is important to decide which structure makes sense for you and your business idea. Your business structure determines which set of rules and taxes will apply to your business. When you are evaluating which structure to choose, it is important to think through these three factors.
1. Potential Size and Liability Protection: With each business structure, even a sole proprietorship, you can have employees. If you intend to be a larger, more complex business, a corporation or LLC may make more sense than a sole proprietorship. Also, if you have personal assets that you would like to protect or are wary of assuming full liability for business-related debts and obligations, then an LLC or corporation may be better suited for your business.
2. Taxes: How you and your business are taxed is dependent on the business structure you choose. You should evaluate the different types of taxes that come with each structure. Also, do not be afraid to consult an accountant if you are not comfortable making the decision on your own based on taxes.
3. Funding and Credit Needs: Typically, lenders are wary of providing funding to sole proprietorships or partnerships without a partnership agreement. These types of business structures are sometimes seen as riskier investments. If you are focused on receiving funding from an outside lender, be sure to understand the type of business structure they prefer.
There are a number of resources to help guide you through this process, including the U.S. Small Business Administration’s resource center. Once you have determined what structure makes sense for your business, register your business with federal, state, and local governments to authorize it to operate. Regardless of the structure you choose, registering your business is a fairly straightforward and low-cost process.
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