Choosing the Right Business Structure Can be Impactful For Your Startup

When you launch a new business startup, you inevitably face several critical decisions. Of all those early decision points, few matter more than your choice of business structure. Simply put, the structure you choose for your startup can have a long-term effect on nearly every aspect of business operation, from how you pay taxes to how you bring on employees.

To ensure you’re making a wise and judicious decision, you must take a few moments to explore the different business structures that exist, comparing their pros and cons.

Sole Proprietorships

A sole proprietorship is the most straightforward form of business ownership, where a single individual owns and operates the business. When you start generating income based on self-employment, the Sole Proprietorship is the default structure.

Sole Proprietorships provide complete control and flexibility; as the owner, you get to make all the decisions and pocket all of the profits. The downside is that there are no limits on personal liability, meaning your assets are at risk if the business incurs debt or gets hit with a lawsuit.

Additional benefits include the ease and affordability of getting a Sole Proprietorship up and running and a very lenient regulatory environment. And, you can pay taxes on a pass-through basis, meaning you do not have to submit a tax return for the business itself. (Indeed, in a Sole Proprietorship, the business is not acknowledged as a distinct legal entity.)

Meanwhile, some additional downsides include limitations when seeking investors or exploring business financing options.

Partnerships

In most regards, Partnerships work the same way that Sole Proprietorships do. The two structures share the same strengths and weaknesses. The one major distinction is that, with a Partnership, you get to share profits and responsibilities with one or more collaborators. This can make it the superior option for entrepreneurs who wish to go into business with a partner as opposed to flying solo.

Corporations

At the other end of the spectrum is the Corporation, which is both the most complex legal structure and the one with the heaviest regulatory load.

There are different ways to incorporate, but at the most basic level, corporations are legal entities separate from their owners. Because of this distinction, Corporations can offer personal liability protections, guarding shareholders' assets from business debts and liabilities.

Corporations can raise capital by issuing stocks, which makes them a good option for startups that hope to bring in a lot of third-party investors or to become publicly traded companies. Yet Corporations are beholden to more regulations than other business structures, such as annual meetings and the election of Boards of Directors, along with strict reporting requirements.

Additionally, Corporations may face double taxation, getting hit once on corporate profits and again on the dividends paid to shareholders. 

Limited Liability Companies

What about entrepreneurs seeking a middle-of-the-road, best-of-both-worlds approach? This is where the Limited Liability Company, or LLC, really shines.

Indeed, LLCs are extremely popular among small business owners everywhere precisely because they combine the ease and flexibility of a Sole Proprietorship with the personal liability protections of a Corporation.

When you register your startup as an LLC, you establish it as a stand-alone legal entity, allowing you to keep business assets and liabilities separate from your ones. This allows you to safeguard your wealth (and familial wealth) from creditors or litigation.

At the same time, LLCs do not come with the same stringent requirements that Corporations face. They do not have to provide extensive public reports, they are exempt from double taxation, and they do not need to hold annual meetings or issue shares.

Moving Ahead with an LLC

There’s no one-size-fits-all solution here, but for a majority of entrepreneurs, the LLC format is the one that offers the greatest upside. This is especially true if you do not wish to take your business public or to court potential shareholders.

The process for registering your startup as an LLC varies by state, but the general process involves just a few basic steps.

1. Choose a State for Registry

Legally, entrepreneurs can register their LLCs in any state. To streamline your taxes and to avoid double registration fees, however, it’s almost always wisest to register in your home state (that is, the state where your business is based and where it generates income).

2. Get a Registered Agent

Every LLC has to have a Registered Agent, someone who can receive official correspondence on behalf of the business. The main requirement is having a local mailing address; so for an LLC in California, for example, it’s critical to have a physical address somewhere within the borders of the Golden State.

3. File Articles of Organization

Registering an LLC naturally requires you to file some documentation, specifically a form known as the Articles of Organization. This document must be filed with your Secretary of State, along with your state-specific filing fee(This can be as high as $300 total, though in some states it’s just $20 or so.).

4. Create an Operating Agreement

An Operating Agreement functions as a charter for your business, outlining how you will allocate duties and profits between your various partners (or how you will handle the onboarding of new partners down the road).

5. Claim an EIN

You will need to get a free Employer Identification Number from the IRS, particularly to administer payroll and file your taxes.

6. Set Up a Bank Account

For LLCs, it’s important to have a business bank account that’s not connected to any personal savings or checking accounts.

Move Forward with the Right Business Structure

Choosing the right business structure is vitally important for all new businesses. Consider all the options, and with any questions, reach out to either a business coach or a qualified local attorney.