A business startup is actually incomplete without the decision of its structure. The structure of a business has a lot to say about its legal position and size of the organization and number of members (with every option having its own set of details). It is highly important to keep in consideration all the pros and cons associated with the options so the decision could be made keeping in view all the necessary aspects. The amount of formalities, taxation and liabilities all depend on the type of business structure that is selected.
The nature of business and its future goals also play an important role in selection of business structure. There are three main types of business structures widely followed.
The one man show – Sole proprietorship is said to be the simplest business structure. It is also one of the most common forms of business as it is easy to form and dissolve; also the proceedings are rather simple and not much regulations to follow. Not only it is simple to form, it also seldom gets complicated if run smoothly. But the sole proprietor is responsible and personally liable for any loss, as he/she benefits from all the profits.
A partnership starts with two people or more forming a business. These individuals have their share of investments in the business and profit and loss distribution is done accordingly (equally or with set ratios, depending upon the agreement). These partners are also personally liable for the losses incurred by the business.
A corporation is a legal entity that is formed to conduct business and is separate in the eyes of law, from the ones who formed this structure. The capital investment is done through floating shares to the general public. The corporation would be taxed and held liable for its losses but the personal assets of the founders would be separate from the corporation’s financial assets.
The considerations that need to be kept in mind while deciding for the organizational structure are as follows:
Taxes are an integral part when starting business, as the financial conditions are directly linked to it. Sole proprietors and partnerships pay direct taxes for their earnings and profits. The business taxes are passed to the owners and the costs incurred, paperwork needed for them are almost the same. Corporations, on the other hand, face double taxation. The owners/shareholders pay taxes on their personal income and also the corporation pays taxes as a separate entity.
Sole proprietorship and partnership businesses require investments from individuals’ own pockets. This, in other words means limited investments. In case the idea is costly and needs open hand of investments, it is better to opt for a corporate structure where the investments could be generated in the form of shares.
The expenses incurred in the business are important to be considered before jumping to conclusions about the corporate structure. The expenses of administration and operations are an integral part and need to be calculated.
d. Legal Formalities
The formalities and paperwork is at its maximum when setting up a corporation as compared to sole proprietorship or partnership. As per the nature and size of the business, the legal paperwork is dependent. If a business owner (owners) cannot afford or manage the high amount of paperwork, the corporation might not be the suitable idea.
It is however, to be kept in mind that with change in circumstances there could be a change in business structure. Once set, it is not a hard and fast rule that could not be shifted at all. Sole proprietorships have often been seen changing to partnerships and so forth.