Limited company or sole trader? LLP or Partnership? Here, we will have a look at the pros and cons of a start-up business. You are all set to set up a new business, but have you thought about how your decision will affect its expansion? The earliest one is company structure: we look at the advantages, disadvantages, tax, and ongoing filling with the four main start-up structures, to help you decide which one is right for you. Here are some of the important ways to choose the right structure for your business.
Until and unless it is an important part of the business plan to raise money on the stock exchange within a defined set of time, you possibly won’t want to start as a public limited company, so it is a four-way crossroad: become a sole trader, develop a partnership, or include a limited liability company or Partnership at the Companies House.
There are several other models, including Community Interest Companies and co-operatives, offshore firms, and franchises, but here will focus on the most common selected routes. Having considered all the options, it is a good principle, to begin with, the simplest structure your plan will permit. You can alter to a more sophisticated model as the business gauges up.
Types of Business Structure
The type of business structure you select depends on three main factors. These are taxation, liability, and record-keeping. Let us have a look at the differences between the most common types of business structure:
Sole proprietorship- It is the most common type of business organization. It is simple to form and provides total managerial control to the owner. However, the owner is personally liable for all the financial practices of the business.
A partnership involves two or more than two people who agree to share in the profits as well as losses of a business. One of the biggest advantages of a partnership business is that the partnership does not bear any tax burden of gains or the benefits of gains or losses are “passed across” to partners to report on their specific income tax returns. One of the biggest drawbacks is liability every partner is individually liable for the economic obligations of the business.
A corporation is a legal entity that is formed to conduct business. The corporation becomes an entity separate from those who initiated it- that handles the responsibilities of the company. Like a person, the company can be taxed and can also be held liable for its actions. The company can also make a huge profit. The vital benefit of corporate status is the avoidance of personal liabilities. The main disadvantage is the cost to create a corporation and vast record-keeping that is needed. While double taxation is at times mentioned as a disadvantage to incorporate, the S corporation avoids this situation by allowing losses or income to be passed through on specific tax returns, as same as a partnership.
A hybrid type of partnership, the Limited Liability Company (LLC), is gaining popularity as it allows the owners to take advantage of the gains of both corporation and partnership business. The benefits of this type of business structure are that gains and losses can be easily passed through to the owners without any taxation of the business whereas owners are protected from personal liabilities.
Ways to Choose the Right Structure for your Business
Selecting which business structure is right for you is an important step when starting a business. The entity you choose has financial, operational, and legal implications. Here are some ways to choose the right structure for your business.
- Business Taxes- Business owners must meet all the state, local, and federal tax obligations to stay in a good legal condition. The kind of business structure you select impacts your personal liabilities and the taxes your business must pay.
- Industry- Typically, companies providing professional services form partnerships as they offer flexibility and are simple to create and maintain. The liability may be restricted or unrestricted, based on the kind of partnership.
- Personal liability- To select the right business structure, you must understand what liability protection each entity structure provides. In a corporation, LLC, limited partnership, and limited liability partnership there are various levels of personal liabilities protection. With an LLC or corporation, only the entity can be sued- not just the owners or officers of the trade.
A limited partnership is developed by one or more general partners and one or more than one limited partner. Limited partners have personal liabilities for the company’s debts, but just the amount they have invested in their business.
In a restricted partnership, general partners have infinite personal liability for the debts of the company. This can be restricted by having an LLC or corporation as a general partner.
In a limited liability partnership, all partners are not just personally liable for the other partners. However, all of them have unlimited personal liabilities for the company’s debt.
- Cost of formation and the current administration. Tax benefits, however, may not provide enough benefits to offset other expenses of conducting businesses as a corporation.
Experts recommend using sole proprietorship. If you are the sole proprietor who owns 100 percent of the business and you are not in a business where a good insurance policy could not take care of potential liability issues, it is better to choose a sole proprietorship. There is no reason to hinder yourself with all reporting needs of a corporation unless you are benefiting from tax implications or protection from liability.
- Flexibility- One of the ways to choose the right structure for your business is to consider flexibility. Your objective is to maximize the flexibility of ownership structure by considering the special needs of the business and personal requirements of the owners. Individual requirements are an important consideration. No two business situations will be similar, specifically when several owners are involved. No two people will have similar objectives, issues, or personal financial situations.
- Future requirements- When you are first starting your business, it is not uncommon to be “caught in the moment.” You are used to getting with the business off the ground and generally are not thinking of what the business might look like after several years. What will happen to the business after your time is over? What if, after several years, you plan to sell your part of a business partnership?
Remember that the business structure you start with may not meet your requirements in the future. Several sole proprietorships develop into some other type of business-like a corporation or partnership- as the company expands and the requirements of the owners change.
Conclusion? Do not take this decision lightly as it plays a significant role, and do not make your choice depending on what someone else has done. Consider the unique requirements of your business and its owners and seek expert suggestions, before settling on a specific business format.
If you are planning to start a business but not sure which business structure to choose. Then, follow these above-mentioned ways to choose the right structure for your business. Once you select a business structure, you will get a tax identification number and file for the important permits and licenses. With the help of an employer identification number, your business will also be in a situation to build a business credit identity with popular business credit reporting companies.