What factors should one consider when choosing a business structure? Getting the right set-up is often a balancing act.
Each business structure has its own set of pros and cons. Thus, it is important when choosing the right structure for a particular business that one consider the goals and vision for the business in addition to the personal needs of the owners. Many business owners may not realize that it is relatively simple to switch from one business structure to another, and chances are a business may change its organizational set up as it grows and develops. Nevertheless, choosing a structure that is inappropiate to the situation could end up being a costly mistake.
When trying to find the right legal structure, business owners should therefore sit down with either a qualified accountant, attorney, or business consultant and consider the following points:
What is the size and scope of the business?
How many owners are there? Does the business have employees? Are these numbers expected to grow in the future? The size of the business and the amount of people involved is important when choosing a business structure. A business with several full-time employees, for example, may be better off as a corporation since several employee benefits are directly tax deductible.
What is the nature of the business?
Is this business in an industry that is open to lawsuits? Is there a lot of equipment or inventory involved? How important is the level of employee talent, skill, or experience to the success of the venture? Each structure has different tax and liability implications. A corporation and an LLC, for example, offer limited liability protection to its owners, while the sole proprietorship and the partnership do not.
How much financing will the venture need for start-up, operations, or growth?
Is the business currently making a profit? If there is access to financing or if the amount of financing that is required is relatively small, then the simple structures, the sole proprietorship, the partnership, and the LLC, may be more appropiate.
Where is the business holding in its development cycle?
Is the venture in the start-up phase; is it a new business, or a growing business? Will there be a significant need for reinvestment in the business now or in the future? These factors will effect business financing and tax needs which can influence the decision on a business structure.
What are the needs of the owners?
Will owners need access to profits? How much structure and control do they want? Business owners should be aware of what each structure will offer them in terms of taxes, liability protection, and control over the business.
What will be the tax implications of each structure on the business and on the owners?
Different structures can effect personal taxes and business taxes significantly. A savvy accountant or business owner will know how to pick a business structure to maximize the situation. A corporation, for example, may be able to save on taxes by reinvesting funds back into the business.
In short, there are several factors that business owners should consider when choosing the right business structure. Though many of these factors overlap, each one is important by itself and should be looked at both separately and as part of a bigger picture with qualified professional.