Business Structure Types: What Type of Company Should You Run?

Do you know about the business structure types? As an entrepreneur, deciding how you structure your company is one of the single most important decisions you’ll make because it will affect a number of things like how you pay taxes.

It’s not a decision you want to make lightly. But just what are the different structures that you can adopt for your business and how do they work? Let’s take a look at business structure types and you’ll have the information you need to make a decision about what direction you want to take your company in.

What Are the Legal Forms of Business?

When you need to select a structure for your business, you have several different options that all have their own unique nuances.

Among those choices are:

  • The Sole Proprietorship – This is a form that many first-time business owners might opt for because it’s operated by one person, can be set up easily compared to other business types, and the costs associated with it are comparatively low. While running the business on your own sounds like an attractive prospect and doing things as a sole proprietorship allows a good degree of freedom, there are some things you want to be careful of under this structure. First and foremost, your name and the business are one in the same in the eyes of the law. This means that the business’s debt is your debt, as are its liabilities. As a result of that, this type of business does not hold the sort of value that others do. Likewise, you wouldn’t have the advantage of being able to raise capital by selling an interest in the company, which means you might have to resort to other means like securing loans, if necessary. You can, however, start under this kind of structure and then move on to another once you’ve gotten accustomed to running your own company.
  • The Partnership – This is what you get when you form a business with another person on what could be as simple and informal as an oral agreement. Like with other business structure types, you will want to seek the consultation of an attorney and have a written agreement about the nature of the company when operating as a partnership. Because of the informal nature of this kind of structure, having someone you can trust as your partner is of extreme importance. This is because, like the sole proprietorship, you and the company (and your partner) are treated as one and the same.
  • The Limited Liability Company – When your business grows, you may consider changing its status to that of a Limited Liability Company (LLC), which allows you some legal protection as far as company debts and obligations are concerned. While an LLC enjoys that increased protection, it all comes with a price. This type of structure can be more costly to set up and is more complex. Likewise, an LLC would require more reporting to the appropriate government agencies than the simple possession of the right licensing and registration that you might find with a single proprietorship. This is favored among business structure types, however, because the opportunity to grow through capital exchanged for interest is there.
  • The Corporation – This is the business structure that is viewed as an individual in the eyes of the law. Property can be owned in a corporation’s name, as can contracts. A corporation can also continue onward even after its original owners have moved on, thanks to ownership by shareholders and management by a board of directors. Likewise, those people responsible for managing a corporation are protected from personal liability when it comes to debt and obligation.But, if you guessed that this kind of entity is more closely scrutinized than other business structure types, you’d be absolutely right. As a corporation, those responsible for running the company have a number of filings and other reporting duties which with they need to comply in order to stay in operation. This all comes at an expense that can far exceed what you might face if setting up a business under any other structure, so you want to give careful consideration when thinking of establishing your business as a corporation. When you think about becoming a corporation, know that there are two business structure types within that; the S corporation and the C corporation.While the two are similar in structure, liability protection, and reporting obligations, they differ in several ways as well. An S corporation, for instance, is limited to only 100 shareholders while C corporations face no such limit. C corporations can also offer multiple classes of stock, as opposed to an S corporation’s one class, meaning that a C corporation has a great degree of flexibility in how it grows compared to other business structure types.

Guiding Your Business

When selecting a business structure, you want to take what works best for your short-term goals into account. It’s important to remember that your structure can be changed as you grow, so you always have avenues to explore as you develop your business plan and try to reach the goals you set for yourself at the beginning of your company’s life. Just remember that, whatever decision you reach concerning business structure types, you want to weigh your options as carefully as possible.

Make sure that you consult with a business attorney and a CPA prior to setting up your business structure. You will find that the investment in their professional services will be one of the best business decisions that you will ever make. By knowing what to expect and being aware of your obligations, you can be one-hundred percent sure that you’ll be able to guide your business the way you truly want to.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

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