What's the Best Type of Business You Can Set Up?
If you are launching a new business, among the first things you need to do is decide what type of entity you will make. The entity you choose will affect not only how much personal liability you'll have to assume but also how you'll be taxed and how you'll be obligated to pay all your employees, among others.
Needless to say, you need to take the time to think things through to determine the best option for your business.
Choosing a business structure is not as easy as it sounds. There are factors to consider, like whether you need limited liability protection that will protect your personal assets should your business get sued in the future.
If your business is more than a hobby, you will need liability protection.
Different Business Structures to Choose From
There are several different business structures to choose from when starting a business. The most common business structures in the United States are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.
Sole proprietorships are perhaps the most common type of business in the US. They are easy and quick to set up and require little paperwork. The owner is the only person liable for the business's debts.
Pros and Cons of Proprietorships
There are several advantages to owning a sole proprietorship. One is that the owner has complete control over the business. The owner can make all the decisions without consulting with anyone else. This can be a huge advantage, especially for companies that are just starting. The owner can also change the direction of the business at any time without getting approval from anyone else.
Another advantage of this entity is that the owner can keep all the profits from the business.
There are also some disadvantages to owning a sole proprietorship, though. One is that the owner is personally responsible for all the debts and liabilities of the business. If the company fails, the owner's personal assets can be seized to pay off the debts. This is a considerable risk, and getting financing for a sole proprietorship can be tricky.
Another disadvantage is that the owner may have difficulty attracting and retaining good employees. In a larger company, employees may be tempted by the benefits and stability of a corporation. But in a sole proprietorship, the owner may have difficulty offering these things.
These are similar to sole proprietorships, but there are two or more owners. In a partnership, each partner is liable for the debts of the business.
Pros and Cons of Partnerships
If you're thinking about going into business with a partner, there are a few things you need to weigh up before making your decision. Here are some pros and cons of partnerships to help you make up your mind.
When you have a partner, you have access to more capital. This can be helpful when starting a business or expanding an existing one. Having a partner also means you have someone to bounce ideas off of and help with decision-making. If you go into business alone, you're shouldering all of the risks. But when you have a partner, you can share the risk and the burden of running the business.
Note that you have to give up some control when you're in business with a partner. You'll need to compromise and trust your partner to make decisions. Any time you have two people working together, there's potential for conflict. You'll need to learn how to handle disagreements and communicate effectively with your partner.
Limited Liability Companies
Limited liability companies (LLCs) are businesses that offer limited liability protection to their owners. LLCs are not subject to double taxation like corporations.
Pros and Cons of Limited Liability Companies
An LLC is an entity that offers limited liability protection to its owners. This means that the owners are not personally liable for the debts and liabilities of the LLC. This is a significant advantage of an LLC over other business structures, such as sole proprietorships and partnerships.
Another plus of an LLC is that it offers flexibility in managing the business. One or more people can control LLCs, and there is no requirement for a formal management structure. This can be a major advantage for small businesses, which may not have the resources to implement a formal management structure.
There are also some disadvantages when deciding if an LLC is the right business structure for your company. One downside is that LLCs can be more expensive to set up and maintain than other business structures. This is because LLCs are subject to certain filing and reporting requirements that other business structures are not.
Another potential disadvantage of LLCs is that they may be less attractive to investors than other business structures. This is because investors may be concerned about their limited liability status and the lack of a formal management structure.
These are businesses that are owned by shareholders. The shareholders are not liable for the debts of the corporation. Corporations are subject to double taxation, meaning that the corporation pays taxes on its profits and the shareholders pay taxes on their dividends.
Pros and Cons of Corporations
The main advantage of forming a corporation is that it limits the owners' liability. This means that the owners' assets are protected if the corporation is sued or incurs debt. Another advantage of forming a corporation is that it can raise capital by selling shares of stock. This is a significant advantage over sole proprietorships and partnerships, which can only raise capital by borrowing money or investing their own personal assets.
A disadvantage of corporations is that they are subject to double taxation. The corporation pays taxes on its profits, and then the shareholders pay taxes on the dividends they receive. This can result in a higher overall tax bill than if the business was a sole proprietorship or partnership. Another disadvantage of corporations is that they are subject to more government regulation than other business entities. This is because corporations have the potential to abuse their power and influence, and the government wants to protect the public from such abuses.
How Can You Choose the Right Business Entity?
Here are factors you need to consider when choosing the right business entity for your business:
The Type of Business You Are In
Some businesses are better suited to certain types of business entities. For example, if you are in a high-risk industry, such as a medical practice, you may want to choose a business entity that offers limited liability protection.
The Size of Your Business
This will also dictate what type of business entity is right for you. For example, a sole proprietorship or partnership may be the best choice for a small business, while a larger company may want to consider a corporation or LLC.
Your Business Goals
Your goals will also play a role in choosing the right business entity. For example, if you want to raise capital from investors, you will want to choose a business entity that is easy to do, such as a corporation.
The Tax Implications
The type of business entity you choose will have important tax implications. For example, a sole proprietorship is taxed as a personal income, while a corporation is taxed as a separate entity.
Choosing the right business entity is an important decision that should not be taken lightly. Be sure to consult with a qualified legal and tax advisor to ensure that you choose the entity that will work best for your business. Even the best businesses require guidance, so don't hesitate to ask for help if you're starting a small business.