Choosing a business structure is one of the most important decisions you must make when starting a new company. The structure you choose informs so many of the other aspects of operating your business, including raising capital, assuming liability, paying taxes and even filling out paperwork.
If you change your mind about your business structure, you may be able to convert it. Nevertheless, this can be difficult, costly and sometimes not even possible. There are many business structures available, but here are a few of the most common.
At its most basic, a partnership is a business that at least two people own together. A partnership is easy to convert to a more formal business structure, so it may be a good choice for you if you want to try out the viability of your venture before formalizing it.
There are different types of partnerships, which mostly relate to the personal liability that you and your partners bear. General partnerships are the most common. In a general partnership, you and your co-owners share all things equally: profits, management responsibilities and liability.
Forming a corporation protects you—and your partners, if applicable—from personal liability for business debts. The law regards a corporation as a separate entity from its owner(s). Therefore, the corporation pays taxes on its profits and bears liability if the company goes into debt or faces a lawsuit. However, if you own a corporation, sometimes you have to pay taxes on your profits twice. First, you pay corporate taxes and then individual income taxes.
3. Limited Liability Company
Though an entirely separate business structure, a limited liability company combines the advantages of a partnership and a corporation. Like a corporation, an LLC offers you liability protection. As with a partnership, you do not need to pay corporate taxes on an LLC’s profits.
There are lots of subtleties to the different types of business structures. You may want to look into them in more detail so you can be sure that you have chosen the one that is most appropriate.