Identifying Business Structure

identifying business structure

Knowing How to Classify Your Company

As an entrepreneur, you’re probably asking yourself about identifying business structure in order to better organize your business to deliver your products and services as efficiently and effortlessly as possible.

By knowing about the organizational structure under which your company works, you’ll not only have a clear idea about who in your company is responsible for what, but what your company is capable of as far as leadership and manpower are concerned.

By having a clear structure in which everyone has a defined role that he or she performs, a job can often get done quickly and without any confusion as to who is responsible for what, but is this kind of organization always needed within a company?

Let’s take a look at the practice of identifying business structure and you’ll get a clear idea about how important it is and whether or not it’s something you’ll need to take up.

The Types of Business Structure

There is no one type of business structure that’s one size fits all.

Since businesses come in all kinds of sizes, so too do the types of structures that cater to those businesses. You wouldn’t need a board of directors for a small, locally owned grocery store anymore than you would attempt to have a single executive run a multinational conglomerate.

Because of this, there are several officially recognized types of business structures that a company can claim, but it all depends on several factors. In addition, each type of structure has its advantages and disadvantages.

So let’s take a look at each type of structure and you’ll be able to determine what’s best for your company.

  • The Sole Proprietorship – Your business is a sole proprietorship is the type of business you run when you are the only employee involved. Whether you simply want to make a little money on the side in order to supplement your full time job or you feel as though you’re enough of an expert in a given subject that you could be successful as a consultant, the sole proprietorship is the business structure you would classify your company as so long as you’re the only employee.
  • The Partnership – This is the structure you would follow if you were starting a company with another person or a small group of people. If you are identifying business structure as a partnership, then it’s important to know that all of the partners are accountable for profit, loss, and liability. Likewise, each partner has a legitimate claim to profit as they are considered joint owners of the company.
  • Corporation – This is the most complex of business structures due to all of the people involved, as well the number of laws that are in place specifically to govern corporations. This type of business structure is unique from the others in that corporations are, in a sense “people.” While a group of entrepreneurs may form a corporation, it eventually becomes a separate entity from those founders. Under law, this means that a corporation can legally do things that people like you and I can do like open bank accounts and own property. Unlike other types of structures, the owners of corporations are not responsible for things like debt and lawsuits. Any financial judgments made against a corporation are taken from its assets, not those of its share and stockholders.
  • Limited Liability Company – This is a fairly new classification of business structure that combines some of the features of both partnership and corporation. If you are identifying business structure as an LLC, then you should know that LLC status is typically granted by state statute. Within an LLC, owners may be individual members, corporations, and other LLCs and most states allow an LLC to have only one member. Identifying business structure as an LLC is advantageous because it allows you more flexibility in how you manage your business as opposed to what you can do with corporation status.

These are the basic types of business structure that you can use for classification when you begin building up your company.

It’s important to remember that each type of structure has its own setup procedures, paperwork, and red tape that you have to work through in order to make sure that you are in compliance with the law. Therefore, it pays to speak with your CPA and lawyer to make sure that everything involved with identifying business structure is in line before you actually get started.

By knowing the rules associated with each type of business structure, and just what the advantages and disadvantages are with each one, you can be well on your way to running a successful company that will be on the minds of your customers for years to come.

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

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This post is a part of a series that helps you identify opportunities and problems within your small business.
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