The choice of business structure affects several aspects of a business. Entrepreneurs should choose an entity that works best for his or her business. Long-term growth depends on tailoring the formation of the business itself. The structure, after all, can affect accounting, tax issues and how much personal exposure the owner has.
The structure can also determine how the business will handle its disputes. There are several types of business formations, according to Forbes.
Types of business structures
Common business structures include sole proprietorships, partnerships, S corps, C corps and limited liability companies. The two easiest to understand are sole proprietorships and partnerships. Independent professionals often have a sole proprietorship or sole ownership. In a sole proprietorship, there is no personal liability protection. Partnerships are still small ventures that involve more than one person.
An LLC, on the other hand, has flexibility with taxes, whereas an S corp has owners and stock. C corps are among the most common structures for public companies. They have size flexibility, different classes of stock and tend to be attractive to most investors.
Factors behind choosing a formation
When choosing a business structure, owners must consider:
- Costs
- Taxes
- Future needs
- Flexibility
- Management
A business owner’s goals should be clear when structuring a business. Does he or she want to raise capital? Does he or she plan to have a small, part-time business? How much money can the owner invest in the company? With all of the different components, it is crucial to have a clear understanding of how each factor affects the choice of business structure.
