Throughout the pandemic, many people have looked for ways to support themselves or to capitalize on regular hobbies. Because of these efforts, a record number of businesses have opened during the COVID-19 era. BusinessInsider.com reports that in September of 2020 alone, there were abound 1.1 million new ventures. This marked a 12% increase from 2019 and the highest number seen since 2007 (a famously busy year for new business openings). There were simply countless new businesses emerging throughout the year –– one of which we even covered in in our profile of the teen-founded home baking business Cakeobite!
Needless to say, all of this has put many more people in the mood to start their own ventures. Now isn’t a bad time to give it a try, though if you want to start a business yourself, you’ll quickly realize it takes more than excitement and an idea. There’s a lot to consider and figure out, and one thing to consider before just about anything else is your business structure. This can affect your rights as an owner, tax liability, growth potential, compliance requirements, and more. It’s important to understand from the outset what the different structures are and which one might best fit your goals.
Here, we’ll get into four of the most common structures.
This is a popular choice for many small businesses because it is easy to start and maintain. It essentially means that the company is not registered with the state and that there is no legal or financial separation between the company and its owner.
Forbes.com notes that you should still register for an Employer Identification Number if setting up a sole proprietorship. You should also consider whether you might need a “Doing Business As” (DBA), which allows you to operate under your brand’s name rather than your legal name. All in all, though, this is the simplest way to set up your own business.
If you do opt for a sole proprietorship, it’s wise to keep in mind that as your company grows, you might ultimately want to change its structure. Even if that proves to be the case though, a sole proprietorship can serve as a nice stepping-stone into the business world.
This structure establishes that multiple people own and operate the business together. There are, however, two kinds of partnerships: general partnerships and limited partnerships. The former means that all partners share responsibilities over all aspects of the company. A limited partnership on the other hand means that limited partners serve only as investors, and do not take active roles within the company.
A limited partnership, in particular, is best if you are expecting to have a significant number of passive investors. That said, it does require more fillings and can be somewhat more complex to arrange. Remember that when you are starting a partnership, you must have a clear yet concise contract drawn up between all partners to establish roles and avoid future conflicts. The contract should include information on how ownership is shared, how decisions will be made, and any partner withdrawal contingencies.
A Limited Liability Company (LLC) is defined on AskMoney.com as an entity that has one or many members –– or in some cases one or many businesses. This is a helpful definition because it speaks to why an LLC can be a great option for a business that ultimately means to open numerous branches. All that’s required is that the main office is registered as such and that agreement are drawn up regarding ownership stakes of the broader company.
The LLC structure is also popular because it poses a very low amount of personal liability (hence the name). This is because the owner and the business are identified as two separate entities under an LLC. This structure also leads to fewer complications where taxes are concerned. Members of the business can even file profits and losses as parts of individual tax returns.
Overall, an LLC is a cost-effective method of legally acknowledging multiple owners, and/or a single owner who does not wish to be personally liable for business matters.
Entrepreneur.com identifies the last structure on this list as the most advantageous. This is because a corporation is essentially a group of people who can function together and enjoy almost all of the legal rights an individual has. Flexibility is also a factor, as it is legally permitted to file to incorporate in one state but operate in another through particular “qualifications.”
Despite the general connotation, many maintain with the word “corporation,” an incorporated business does not have to be a big one either. It merely needs to be officially incorporated, and it must maintain a board of directors in charge of decisions. The downside, especially for a smaller entity, is that burdensome tax policies (such as double taxation) can come into play. That being said, the legal and corporate payoffs can be terrific if the corporation is handled correctly.
In the end, your choice of company structure should depend on what you plan to do with your business. But these are four of the most common options, and each one comes with its own benefits. You’re free to change the structure at any point, but starting off with the one that best suits your business vision is a good way to set yourself up for success.