5 Factors for Choosing the Right Business Structure

by Akhil Shahani
 
Now that we've given you the heads up on the kinds of business structures available to you, we will take you through the 5 critical factors that you need to evaluate before choosing a business structure:
 
1. Legal liability - The single most important reason for incorporating a business is protection of personal assets. In the event of a lawsuit or judgment against your company, no one can seize your personal assets. The decision to incorporate your business depends on whether your business lends itself to potential liability and whether you can personally afford the risk of that liability. For example, if you are investing in heavy machinery or equipment, sole proprietorships or partnerships will not be the right choice for you. On the other hand, if you want to start a tax-consulting business, incorporation is not really necessary.
 
2. Tax implications - There are more tax options available to corporations than to proprietorships or partnerships. Owners of unincorporated businesses such as sole proprietorships or partnerships pay income taxes on all net profits of the business. On the other hand, owners of a corporation do not pay personal income taxes on profits they do not receive, and they also have the added advantage of lower federal corporate income tax rates on the first $75,000 of income as compared to the federal individual income tax rates on an equivalent amount of personal income.
 
3. Expenses - Sole proprietorships and partnerships are easy to set up - there are no special forms to be filled, nor any fees to be paid to start your business. Neither do any special operating rules need to be followed. On the other hand, Limited Liability Companies (LLCs) and corporations cost more to start and are more difficult to maintain. To form an LLC or corporation, you must file a document with the state and pay a fee. In addition, owners of corporations and LLCs must elect officers to run the company, and keep records of important business decisions and follow other formalities.
 
4. Individual Needs - Your needs as an individual are a critical consideration. What are you looking for? Do you want 100% ownership of the company? Are you willing to work with partners? These are key questions that you have to answer before deciding the appropriate business structure.
 
5. Flexibility - When you're first starting out in business, your main concern is getting the business off the ground. You are not usually thinking of what might happen in five or ten years. What will happen to the business after you die? What if you decide to sell? It is important to choose a business structure that allows you the greatest room for growth. A sole proprietorship is easy to set up and expand into whatever you want it to become.
 
There is no single choice that fits every business; no two businesses are alike. Your job is to pick the structure that best meets your needs and keep in mind that the choice you make now is not etched in stone; you can always change the structure of your business depending on your needs and market expectations.
 
About the author:
Hi, I'm Akhil Shahani, a serial entrepreneur who wants to help you succeed. If you like to work smart, check out http://www.SmartEntrepreneur.net
 
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