Let's Learn the Basics of Business Structures

Take your shoe size for example. Only one size would fit you properly, right? Business structures are the same. Depending on your operational model, the business structure that best suits you would be unique.

Many entrepreneurs ask a single question over and over again in an attempt to figure out the best answer: 

“What is the best business structure for my business?” – For some the answer comes after long years of experience and exposure and for most others, the answer could be derived by answering two simple questions.

So ask yourself

1)      What is the best way to protect yourself (both the business and personal assets) from general business liabilities?

2)      What entity and model will provide you the best tax benefits?

Before answering the above questions, let’s look at the types of entities and their functions:

Sole Proprietorship – this is the easiest way to start a business as initial requirements and costs of the model remain to a minimal. Every State has a different set of formalities depending on their law. However, you are most likely to need a business license, a registration number or a franchise, and an occupancy permit for the intended location of your business, despite your State of business interest. All these procedures and autonomous in nature which means you don’t have to spend money on attorneys. After all, sole proprietorship is all about being your own boss – the only owner there is to the business!

General Partnership – Starting up a general partnership too is quite easy however you will be expected to formalize (in writing) the roles and responsibilities of the partners, the portion of the capital each partner is expected to pool in, authorization and cash withdrawal policies, policies on sharing profit and losses, the procedure to follow during disputes and conditions and terms of dissolving the partnership.

Limited Partnership – This is the most recommended formality to businesses as it is protected by law. In limited partnerships, the partner’s liability is restricted to the amount he/she contributes as the investment. Therefore, it allows partners to enjoy profits from the company without being susceptible for plights of the business downturns.

Corporations – This involves complex legal procedures in which an incorporator would get involved in forming a corporation by filing an application of charter to the State in which the business would be registered. This document will detail the personal details (name, addresses) of all incorporators, the purpose of the incorporation, types of capital stock and their respective figures plus the privileges/rights of each class of stock.

Limited Liability Company (LLC) – The nature of limited liability has put this entity in the forefront among business owners while offering a one-time tax on the owners as opposed to recurring corporate taxes. The advantages of LLC’s may different from State to State so it is best to discuss the implications (both positive and negative) and the eligibility of your business with a lawyer.

Now that you know about each entity, ask yourself those two questions we posed at the beginning to figure out which type suits you best!