“To each his own,” as the expression goes. The same holds true for business structures—there’s no universally “right” structure for all businesses. Choosing the best one depends on the specific needs you and your business have. Before setting up your company, it’s important to understand all the options available to you—in particular, you’ll want to evaluate the advantages and disadvantages of each business formation, paying special attention to the tax implications and government formalities.
We will look at four forms of business ownership in this step:
- Sole Proprietorships
- Partnerships
- Corporations
- Limited Liability Companies
Forms of Ownership
For starters, it’s important to take the time to review your life plan and business plan. What should emerge are answers to questions like:
- Do you want investors as shareholders in your company?
- Do you want to maintain control of the company if you have investors involved?
- Do you anticipate losses in the early stages that can be taken as tax benefits by shareholders?
- Do you want to avoid double taxation?
- Is there a great risk of liability associated with your specific business?
To help you determine the best structure for your business, we’ve put together an overview of several options. And remember, it’s always best to work closely with an attorney and/or accountant to ensure you make the right choice.
Sole Proprietorship
Sole proprietorships are a popular choice for many new business owners because so little is needed to set them up. Apart from local business licenses, there are minimal government fees and paperwork.
On the other hand, there are also considerable risks to consider—for example, your personal assets are vulnerable to creditors and other liabilities such as lawsuits. You also don’t get to take advantage of certain tax breaks that are reserved for more formal business structures such as Corporations or Limited Liability Companies.
Most importantly, as a sole proprietorship, your company name is not protected. In other words, there is nothing to prevent another company from incorporating under your business name.