How to Select the Right Corporate Structure for Your New Business
Choosing your new company’s corporate structure is an important decision. The structure you select determines the business’s management hierarchy, tax rates, lawsuit liability, and fundraising abilities. Making a change later is a confusing process that can cause tax penalties. Here are a few factors to help you make the right choice the first time.
Limited Liability Company
Many small businesses file as a limited liability company, commonly known as an LLC. This type of organization is easy to set up with less paperwork and offers flexibility in choosing the business’s ownership, management, and taxation. In addition, it provides financial and legal protection for the owners unless a criminal act or fraud is committed. Another advantage is pass-through taxation, meaning earnings are filed as personal income eliminating the chance of double taxation on personal and business income. Finally, an LLC gives your small business credibility and is a way to build your company’s credit history, making it easier to qualify for a business loan.
The sole proprietorship is an excellent choice if you want to be your own boss and run a business from home. However, it makes you solely responsible for the company’s debts and profits. It is easy to set up, requires little paperwork, and is simple to dissolve if you change your mind later. You may also be eligible for tax deductions exclusive to sole proprietorship companies, such as a deduction for health insurance. Any profits are categorized as personal income as well.
A partnership may be the way to go if you plan on going into business with a partner. Although more expensive to set up than an LLC or sole proprietorship, it enables you to make joint business decisions and share profits and losses. This structure makes you more likely to qualify for a small business loan since two personal credit histories are considered. Any business income is reported as personal income.
A corporation is the best structure if you have big expansion plans for your company. It offers you favorable tax rates, the ability to sell stocks, and gives you liability protection. Your company must have a board of directors that meets several times a year. This allows the business to continue should one of the founders exit. You also can secure multiple investors to raise capital to launch the company.
Choosing the proper corporate structure for your company helps you set your new business up for success.