Choosing the structure for your new business
Being new to the business world can be a daunting thing. Understanding all the different aspects of business with benefits and potential pitfalls is important in creating a long-term business strategy that will work for you. Registering your company is one of the earliest steps you can take when it comes to starting a new business and knowing which type of company is best for you will help you to start in the right direction.
This is the easiest and cheapest way to set up a new business. A sole proprietorship is not considered to be a separate entity to your personal finances for tax purposes so there is some risk associated with operating as a sole trader. The benefits of operating as a sole trader are that you can operate a small business without larger expenses like corporate insurances or higher tax rates which will help you to establish yourself in the market without significant personal investment.
For those that are operating two or more people having ownership, a partnership is the best way to ensure that both people are registered as the legal owners of the business. There are two types of partnerships that you can set up:
- Limited partnership – where the predominant partner has unlimited liability and other partners have limited liability
- Limited liability partnership – where all partners have unlimited liability
The type of partnership that you choose will depend on your business setup. A limited partnership might be better for businesses with silent investors while a limited liability partnership will benefit those businesses where all partners are actively working in the business.
A limited liability company (LLC) is the next step up from sole proprietorships and partnerships where the company is considered to be a separate entity. Though the profits and losses are still run through the personal finance of the company owners, the registered owners’ personal assets are protected from situations such as bankruptcy and legal action. With this next step up in business structure, you will have things like LLC business coverage to keep in mind, but for the extra protection that this type of structure offers to you personally, these additional expenses can be a worthwhile investment. A qualified accountant will be able to better explain the steps involved with gaining the protection of an LLC if this is the business structure that you choose.
There are several corporation types that you can choose which are considered to be a completely separate legal entity to personal finances. The owners of a corporation hold no liability as the corporation can be held legally liable, taxed, and make a profit as its own entity. While in other business structures, profits are taxed through the owners’ personal finances, a corporation must pay its own tax. Corporations incur the highest expense when it comes to setup, but they also provide the ultimate protection for the owners. Types of corporations that can be set up include:
- C corp
- S corp
- B corp
- Close corporation
- Nonprofit corporation
Deciding which of these is right for you should be done with an expert in the field such as a lawyer or business accountant.
Choosing your business structure is an important step in creating a new business and should not be taken lightly. The choices you make in the beginning could have serious impacts on yourself and your business later down the road.