The Complexities of Business Structure
There are many different factors to consider when opening, and subsequently registering your own business with the government. Perhaps the most important thing to completely understand before proceeding is the various types of business structures and which best applies to your own situation.
Knowing the differences between business structures can be much more vital than you even realize--in some cases putting not only your business, but also your personal finances at stake. Consider all of the following before making any decisions that could drastically impact the future of your business--possibly before it even begins:
- Investors and partners: Just having a business partner that is not your spouse can often dictate the type of business structure available. If you are the sole investor and own all the stake in the business, your options are often much more diverse.
- Type of business: This can be one of the biggest determining factors when choosing a business structure. If you are opening a business that could lend itself to safety, well being, or other accidents, it is best to separate the finances of the business from your own.
- Projected size of the business: Including the size of your customer base, the number of people you employ, as well as your projected financial records, the size of your business can impact things such as shareholders, tax brackets and deductions, as well as liability.
These are just some of the many things you must plan for in advance when choosing a structure for your business. While there are quite a few choices, the below descriptions of common options for registering a business should provide you with a more than adequate foundation to begin the process:
Sole Proprietorship: Limited to individuals or couples opening a business without any outside investment, this is the most common business structure seen. The sole proprietorship platform also offers many benefits for certain businesses--including managerial control, lower taxes, as well as significantly less regulations and rules to not only legally form the company, but run it as well. This is generally the best option for smaller businesses with a low risk for liability. On the other hand, registering your business as a sole proprietorship links the financials of your company to your personal equity and assets.
Partnerships: There are two types of commonly seen partnerships--a general partnership and a limited partnership. A general partnership is a very simple structure--it consists of two or more people who contribute capital, labor, or expertise to a business and equally share in both the profits as well as the losses. Conversely, in a limited partnership, there are general partners that equally share profits and losses in addition to limited partners whose losses are limited to the threshold of their investment. In both instances, general partners are mostly involved with the operations aspect.
Limited Liability Corporation: A Limited Liability Corporation, or LLC, is a special type of company that can involve one, or multiple parties. A written agreement is normally initiated when the business is formed that outlines a rigid and definite structure including things such as management, as well as the distribution of profits and losses--in addition to any other specificity pertinent to the parties.
Corporations: This is the most complex of all the business structures, but often the most applicable for larger establishments. Due to its structure--generally consisting of a Board of Directors that oversees a more compartmentalized management system, as well as investors that share in profits and losses. Private corporations generally have most of the stake and investment internally, while public corporations lend themselves to growth by individual investors. Corporations are subject to much tighter restrictions, but also receive tax credits, are actually considered people under the law, and have an almost endless potential for exponential growth. Generally speaking, losses are limited to investment--protecting individual shareholders from any undue hardship.
The above descriptions will provide you with an adequate foundation for choosing a business structure that best fits your needs. It is important to adequately research all laws and regulations to best succeed--which can sometimes be geographically specific. Choosing the correct business structure that will yield the best results is one of the biggest decisions any budding company needs to make.
About AJ Romano
AJ Romano is a writer and poet, a mixed media artist, musician, and photographer from Central New Jersey--now living in Bayonne. He has published full length books, many blogs, as well as web content.