Choosing the Right Corporate Structure for Your Business: An Overview
Growing a business does not require a college degree or training. But some decisions require thorough analysis. Keep reading to learn how to choose the proper corporate structure for your business. You’ll learn that the right legal structure will prevent tax, paperwork, and registration problems.
Why You Should Choose the Right Corporate Structure
Your legal structure affects a lot of aspects of your business. Here are some factors to consider when deciding on a corporate structure.
Liability
Do you want to protect yourself from a lawsuit? You may consider a limited liability company, although the federal government does not recognize them. This business structure is only recognized on a state level.
Taxes
Some companies classify their businesses as personal income. These include sole proprietors, S corporations, and partnerships. Meanwhile, some businesses’ incomes are separate from the owner’s personal income, such as a C corporation.
Hierarchy
You can only be a CEO if you have a corporation. That’s because CEOs need to be appointed by a board of directors. In other business structures, such as when you don’t have a business partner, there’s no need to have a hierarchy.
Paperwork
Tax forms are different among every business legal structure. And if you have a corporation, one of the requirements you must submit includes articles of incorporation. You also have to file a government report if you have a corporation.
Registration
Registering your business in your state will entail entering a legal structure. You will not get your employer identification number if you haven’t decided on your corporate structure.
Other Reasons
One of the most important reasons to choose the correct corporate structure is to avoid potential consequences. The wrong business structure can lead to a disorganized set of employees and confusing business processes. These will affect your taxes and other factors.
The Common Corporate Structures
Let’s look at some of your choices when deciding on corporate structures.
Sole Proprietorship
A sole proprietorship is the simplest structure where you are the company’s sole owner.
- Sole proprietorships are inexpensive. There is a small registration fee at the county government.
- Paying taxes as a sole proprietor is much easier.
- You can still hire employees, but the taxes will be more complex.
Partnership
Partnerships are ideal if there is more than one business owner. You can take advantage of both your expertise for business success.
- Partnerships work better when there is an agreement so you can lay out who is in charge of what.
- Partnerships pass through losses and profits to the partners.
Limited Liability Corporation
A limited liability corporation or LLC offers sole proprietorship and partnership flexibility. They also provide the limited liability of a corporation.
- An LLC is more difficult to form than sole proprietorship or partnership.
- You will only be taxed on your profit share as an LLC.
Corporation
A corporation is the most complex legal structure with intricate tax demands.
- You need to file your articles of incorporation and Federal Tax Identification number.
- This legal structure is perfect for businesses that are more established.
