5 Most Common Business Structures To Determine What’s Best For Your Start-Up
by Abdul Aziz Mondal Business Published on: 19 December 2022 Last Updated on: 19 October 2024
There are over 500 million entrepreneurs in the world today. If there is a market for a product or service, there’s an opportunity to build a business. Most businesses start with an idea. A good business idea comes from identifying a problem and providing a solution. It must have been a pain to make a sandwich in the 1920s.
But the introduction of sliced bread has eliminated that problem, and even coined the expression “The best thing since sliced bread” that’s common today. Successful businesses address people’s pain points.
You might have a good idea and a promising business plan, or you may have started with a hobby that earns you some decent money. If you’re trying to determine the most appropriate structure for your business, try thinking long-term. Based on your business plan, how far do you want to take the company? Will you have employees? Will you have a business partner?
The answers to these questions will help you decide on a business type and how you want your business to be taxed. Although the logistics of your business will likely change over time, here are the five most common business structures to keep in mind while building your start-up.
Details About 5 Most Common Business Structures
1. Sole Proprietorship
The sole proprietorship is the starting point for most businesses. If you’re a sole proprietor, you are the only person who owns and runs the business. There are over 20 million sole proprietors in the United States alone, and that number may grow as more people enter the gig economy. As a sole proprietor, you keep all of the profits from the business, but you’re also fully liable.
One of the reasons most businesses start as sole proprietorships is the ease of engaging in business transactions while testing your idea in the market.
Whether you want to start a candle-making business or create an application for a financial technology service, your business begins with the first dollar you make. Essentially, from a tax perspective, you automatically become a sole proprietor by default once you start making money.
2. Limited Liability Company
If you do start with a sole proprietorship, you can form a limited liability company (LLC) to protect personal assets. An LLC allows you to keep personal assets separate from your business. This business structure is best if you have assets like a home or investment accounts you want to secure if someone sues your company.
You should also consider the type of product or service you offer to determine if an LLC is right for your business.
Owning and operating an LLC is more involved than some like to admit. You will need a registered agent, and there are usually annual filing fees. But if you have a high-risk business, an LLC is well worth the investment. If you run a sole proprietorship now but plan to hire employees in the future, you will need to form an LLC to open a business bank account.
For example, you may start as a health coach offering coaching services and then decide to bring on more health coaches to work for you as your clientele increases. An LLC would give you the ability to write checks for your coaches from your business bank account while protecting personal assets from litigation.
A business bank account is extremely necessary while running your LLC because you have to keep your personal and business accounting separate to claim limited liability status.
3. Partnership
If you’re starting a business with someone else who will have equal ownership, you will likely form a partnership. You have the option to form an LLC for a partnership too. It works the same way, protecting you and your partner’s assets from bankruptcy and lawsuits.
Only eight percent of businesses are structured as partnerships, as they can be less stable when you’re relying on someone else to commit. Certain professions like lawyers and doctors gain more from forming a partnership.
If you’re working on a start-up with a partner, have a solid partnership agreement on record and obtain limited liability status to ensure the best outcome.
4. Corporation
The corporation business structure is the “beast” of all structures, as it requires detailed documentation and record-keeping. You will need excellent processes in place for things like accounting, fixed asset inventory, and operations agreements.
Corporations also protect personal property, but instead of being owned by one or more individuals, the company is owned by shareholders.
Depending on how much revenue your business generates, a corporation could potentially save you money in taxes. But one of the greatest benefits of forming a corporation is the ability to raise capital by selling stocks in the open market.
You may not see your business becoming a corporation initially, but you might consider changing the structure as the business grows. For example, you might be a sole proprietor who forms an LLC that uses S corp taxation as your income increases.
5. Nonprofit Organization
Most religious, charitable, and healthcare businesses operate as nonprofit organizations. A nonprofit organization does not have an owner and is exempt from federal and state taxation if it has obtained 501(c)(3) status from the IRS.
These organizations can receive an exemption from taxes because they generally offer necessary products or services to the public. If you’re considering establishing a nonprofit organization, you will need a strong fundraising model and a nonprofit organizations to help the organization stay active in the community.
Final Thoughts
Entrepreneurship has become increasingly obtainable for people of all ages and backgrounds as the gig economy has grown exponentially within the past few years.
People are able to take their acquired skills and talents and build businesses for themselves. If you’re thinking about a start-up, the business structure you choose can save time and money down the road.
If you’re starting up alone, you will likely start as a sole proprietor with the option to form an LLC. You can also choose to go into business with a partner, start a corporation, or establish a nonprofit organization.
In the entrepreneurial world, the possibilities are endless and setting up your business the right way allows you to serve your customers well.
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