Before you choose a business form for your organization, there are many variables you need to consider. Many of these variables are fairly minor, but others will drastically impact the business and tax laws your organization will have to follow. Choosing a business form is a major decision that should never be made without considering all of the facts first. Here are 10 things every business owner should consider before selecting an organizational structure.
1. Ease: Sole proprietorships are the easiest business structures to establish. Setting up a sole proprietorship is usually as simple as opening a checking account at your local bank. Partnerships are also relatively simple to set up, but you will have to follow additional rules and guidelines. Corporations are the hardest business structure to establish, and they involve strict adherence to state and federal laws. Setting up a corporation is also expensive, time-consuming, and complicated.
2. Termination: Some business structures instantly dissolve once the owner dies, leaves, or sometimes divorces. Other businesses are only allowed to exist for a state-mandated amount of time. Before you choose your structure, you should consider whether or not you would want to carry on the business without a partner.
3. Risk: In a sole proprietorship, the sole owner of a business will be held responsible in the event of a legal issue. In a limited liability partnership or corporation, individuals can only be held liable to a certain extent. If the business accumulates a significant amount of debt, the personal property of the individuals cannot be seized in order to resolve the debt.
4. Cost: A sole proprietorship or general partnership are the cheapest structures to set up. Limited partnerships and corporations are far more expensive and most people will need to hire an attorney in order to understand and draft complicated legal documents.
5. Operations: If you like the idea of having complete control over you business, you should establish a sole proprietorship. If you are comfortable with having a lesser degree of control, you should consider forming a corporation or partnership. In a corporation, only the members of an executive board will have decision-making rights.
6. Information: Are you comfortable with the public knowing extensive details about the finances and operation of your business? Corporations are legally required to provide this information to the government, which will then provide it to the general public. Individuals in sole proprietorships and partnerships are entitled to a much higher degree of privacy.
7. Taxes: Many states levy taxes on individual businesses. This issue is more common with limited liability companies, but it is still important to understand local tax laws before choosing a business structure.
8. Right to Sell: If you want the freedom to sell your business whenever you please, you should definitely establish a sole proprietorship. Once you sell the assets of your business, the business will cease to exist. Selling a partnership involves getting the approval of several individuals.
9. Expanding: Every business owner dreams of expanding their business, but some business structures are only allowed to have a limited number of shareholders. A sole proprietorship will cease to exist once it takes on a partner and if the new partner is uncomfortable with expansion, there will be no way to make the business grow.
10. Capital: A lack of capital is enough to run any companies out of business. Corporations and partnerships are capable of raising capital with the greatest amount of ease. The owners of sole proprietorships normally raise capital by using their own assets as collateral.
Before you settle on a structure for your business, please consider the information above. Once you choose a form, it is very difficult to reverse your decision. By keeping your own needs in mind, you can select a structure that will be beneficial to the health of your company.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.