How to Choose the Right Corporate Structure for Your Small Business
In general, the following factors should be taken into account when making such a decision: Your own personal assets and liabilities Your existing capital and need for outside investors Your ability to attract outside investors State licensing...
Step-by-Step Guide
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Step 1: In general
This is one of the first concerns for any new business.
Unless you have the personal assets or can tap into family, friends, or your bank, you'll be seeking investors who will look at:
Returns on their investment Protection from personal liability Tax situations — their personal situation and that of your business , If, however, you don't need investors or are not seeking shareholders when starting a business, you can do what many other business owners have done — start small as a sole proprietor. ,, For example, someone who is opening a business that will sell goods to customers via the Internet or through mail order is less likely to garner lawsuits than someone who owns physical store locations, where customer foot traffic and potential injuries could result in a lawsuit.
However, many small business owners opt for coverage from insurance policies rather than go through the time and expense of incorporating. , It is also assumed that a professional business such as a brokerage house or an accounting practice will have greater assets; this makes them bigger "targets" in our overly litigious society.
Therefore, such an enterprise would more likely choose a business structure that protects its personal assets.
Likewise, someone who has already enjoyed previous business success — and has significant assets from this previous venture — would want to protect those assets closely. , If you expect it to take several years before you see a profit, you might select a Subchapter-S corporation, so that shareholders can offset some of their personal income with losses from the business.
On the other hand, if you expect to see profits within the first three years, you may wish to create a limited liability company in order to take advantage of the “flow through” taxation benefits. , Some select this method primarily because it provides the easiest way in which to start and open a business quickly.
The downside to this method however is that it exposes the business owner to individual liability, which simply put, means that if the business is sued, the sole proprietor's personal assets are at risk. , Therefore, it is wise to sit down with both an attorney and an accountant to discuss the details of the business you plan to start.
Consider where you see it going in five or 10 years.
Cover all the bases — including liabilities, taxes, employee benefits, and the need for investors — before making your decision.
Then choose the decision that's best for your new business from all aspects. , This is called alter ego liability, and emphasizes the need for any business that has incorporated, no matter how small, to abide by the guidelines of the state in which it's incorporated. -
Step 2: the following factors should be taken into account when making such a decision: Your own personal assets and liabilities Your existing capital and need for outside investors Your ability to attract outside investors State licensing
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Step 3: statutes
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Step 4: and tax requirements The time commitment necessary to handle regulations and formalities The size
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Step 5: and type of business you're starting Startup costs
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Step 6: including licensing and other fees.
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Step 7: The Need For Funding.
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Step 8: While most businesses can only anticipate future returns
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Step 9: the business structure that protects personal assets and provides a favorable tax environment
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Step 10: such as an LLC or a corporation
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Step 11: will be most attractive to investors.
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Step 12: Determining not only the type of business you're starting
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Step 13: but also the type of customers you'll attract and the manner in which you'll attract them
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Step 14: should be factored into your decision-making process.
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Step 15: The potential for liability from customer relationships or interaction impacts heavily on your liability risk.
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Step 16: Accountants
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Step 17: brokers
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Step 18: or financial consultants offering advice and personal services may run a greater risk of a lawsuit from someone claiming they received "bad advice."
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Step 19: How fast you anticipate your business growing is also of concern when selecting your corporate structure.
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Step 20: A sole proprietorship is another common choice for many people starting small businesses.
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Step 21: Apathy can come back to haunt a successful entrepreneur.
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Step 22: The courts may hold a corporation's shareholders liable if they believe the corporation is not adhering to the formal regulations it must follow.
Detailed Guide
This is one of the first concerns for any new business.
Unless you have the personal assets or can tap into family, friends, or your bank, you'll be seeking investors who will look at:
Returns on their investment Protection from personal liability Tax situations — their personal situation and that of your business , If, however, you don't need investors or are not seeking shareholders when starting a business, you can do what many other business owners have done — start small as a sole proprietor. ,, For example, someone who is opening a business that will sell goods to customers via the Internet or through mail order is less likely to garner lawsuits than someone who owns physical store locations, where customer foot traffic and potential injuries could result in a lawsuit.
However, many small business owners opt for coverage from insurance policies rather than go through the time and expense of incorporating. , It is also assumed that a professional business such as a brokerage house or an accounting practice will have greater assets; this makes them bigger "targets" in our overly litigious society.
Therefore, such an enterprise would more likely choose a business structure that protects its personal assets.
Likewise, someone who has already enjoyed previous business success — and has significant assets from this previous venture — would want to protect those assets closely. , If you expect it to take several years before you see a profit, you might select a Subchapter-S corporation, so that shareholders can offset some of their personal income with losses from the business.
On the other hand, if you expect to see profits within the first three years, you may wish to create a limited liability company in order to take advantage of the “flow through” taxation benefits. , Some select this method primarily because it provides the easiest way in which to start and open a business quickly.
The downside to this method however is that it exposes the business owner to individual liability, which simply put, means that if the business is sued, the sole proprietor's personal assets are at risk. , Therefore, it is wise to sit down with both an attorney and an accountant to discuss the details of the business you plan to start.
Consider where you see it going in five or 10 years.
Cover all the bases — including liabilities, taxes, employee benefits, and the need for investors — before making your decision.
Then choose the decision that's best for your new business from all aspects. , This is called alter ego liability, and emphasizes the need for any business that has incorporated, no matter how small, to abide by the guidelines of the state in which it's incorporated.
About the Author
Charles James
Brings years of experience writing about DIY projects and related subjects.
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