Business

What Business Structure Best Suits Your Business Model

posted by Chris Valentine

Every business owner and entrepreneur should know what they’re getting themselves into, what kind of business they are running, and what are its goals. Coming up with a business model is not over until you incorporate it with the overall structure that you’ve chosen for your company. Take a look below at some information that can help you do that.

Why It’s Important To Choose One

You need to keep in mind that choosing a business structure in your country may have some restrictions regarding aspects regarding the types of businesses that can operate in each structure. So it’s important to learn what’s allowed and what’s not to avoid any possible problems with the government or the secretary of state. There are a lot of advantages and disadvantages of each type of business structure. You just have to keep your vision in mind at all times, know what your business model is like, and integrate it with the structure you choose. Depending on the type of business you are starting, some of these disadvantages may not affect you as much as others. The only thing you need to make sure of is that the business structure works best for you, and you are familiar with the applicable requirements needed to run it.

Taking The LLC Approach

Maybe your business model goes well with this because sometimes the right choice of business structure is a simple one. For over 80% of small or large businesses, choosing a limited liability company can be beneficial because it eliminates some of the negative aspects of a business structure. It basically means that you’d be a private company that is legally responsible for your debts only to the extent of the amount of capital that you initially invested with. It can be good because it incorporates the benefits of the corporation structures, with the liability protection that can be enjoyed without the double taxation. Your earnings and losses pass through to you and are included on your personal tax returns as an owner. So if this fits well with your vision, then you should go for it.

Nothing Like The C-Corporation

Some people might argue that going for this structure is the way to go, as it gives owners another way to be mostly protected from personal liability of business debts. But your company has to follow certain formalities to achieve this. Doing tasks like filing annual reports, maintaining separate bank accounts, keeping track of meeting minutes, and holding shareholders meetings. This is very important for you because it means you can share corporate profits with the company, lowering the overall tax rate that way. You can also have unlimited numbers of shareholders with you. And if in the future you decided for a change and wanted to take your company public by selling shares over the public trade, then you will need to be in a C-Corporation. So starting out that way has its perks, saving possible trouble down the road for you.

Sometimes The Default Method Works

If you choose to be in a sole proprietorship, then you have an easy way to form a simple business and it gives you complete control over it. You’re automatically considered to be a sole proprietorship if you conduct business activities but don’t register as any other kind of business and with the Secretary of State. You will not produce a separate business entity this way, which means your business assets and liabilities are not separate from your personal assets and liabilities. So you can be held accountable and liable for the debts and obligations of your business. Because of its simplicity, it’s perfect if you’re operating a low-risk business and you want to test out your idea before forming a more formal business later.

It’s Possible That You Need An Extra Helping Hand

Most owners opt to get someone else to take a piece of the cake, a partnership that expands the business to be owned and operated by two or more individuals with you. They can come in two varieties, a general partnership, and a limited partnership. In a general partnership, the partner manages the company and assumes responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners, meaning it’s mixed with different roles. The general partner owns and operates the business and assumes liability for the partnership, while the limited partner serves as an investor who has no control over the company and is not subject to the same liabilities as the general partner. You will have some tax benefits with this structure. One of the biggest advantages that you can get is that this structure doesn’t pay tax on its income but instead, it passes through any profits or losses to the individual partners. And when it’s tax season, each partner files a Schedule K-1 form, which shows his or her share of the partnership income, deductions, and tax credits. Not a bad structure to adopt if you ask me.

The S-Corporation Style

If you’re the owner of a small business, then this structure would be more appealing to you. That’s because it has some attractive tax benefits and still provides business owners with the liability protection of a corporation. With this structure, income and losses are passed through to shareholders and included on their individual tax returns. As a result, there’s just one level of federal tax to pay. As the owner, you can use any losses of the company on their personal income tax returns, reducing personal tax liability in many instances. Think of it as a C-Corporation but you want it to be treated as an S-Corporation instead, you just have to be sure if it’s viable with your business model or not.

Understanding the different structures available to you is paramount, your business model, goals, and plans won’t last long if they aren’t running in the appropriate business structure. Choose wisely and think about all the possible outcomes, then watch as an owner how your company can flourish and boom with success.

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