Structuring Your New Business

The structure of your business can have a huge impact on it's success or failure. It will determine the control you will have over it, the amount of working capital that will be available, as well as the risk of liability you will be taking on.

By structure, I am referring to the legal structure; the way you're business will be ran, taxed and financed.

The most common form of structure is the sole proprietorship. This is due to the ease of setting it up and the low cost incurred to do so.

The sole proprietor has the full ability to control the business, from the hours of operation, to the quality of service provided, and even the hiring and firing of employees at any given time. The sole proprietorship status allows you to decide how profits are spent, whether by you personally or reinvested into the business, and will be taxed as an individual would be. You will complete a personal tax return each year, reporting all earnings, deductions, and assets acquired.

Along with the control of the revenue and decision making, comes the full responsibility of debt and liability. You will be held liable for any and all bad debts and judgments, leaving your personal possessions vulnerable. Also, with the freedom of control, comes the responsibility of running the business and carrying out all duties necessary to be successful. Unless you intend to pay the price for specialists, you will need to be very diverse with your business experience and abilities.

If there are aspects you know you cannot carry out, or responsibilities that will be extremely difficult for you to handle while performing your day-to-day responsibilities, you may want to consider a partnership.

Partnerships allow for relief in areas in which you are not comfortable and can bring many options to the table. If you find someone that is able and willing to handle tasks that you are not, or if you have limited funding available to keep the business afloat until profits are seen; a partner can pick up the slack in one or both of these areas.

Partnerships are much like a sole proprietorship in the ease of set up and low cost start up. The tax structure is also very much alike. You will each be reporting your earnings through a personal income tax return and only pay on your individual earnings.

Although you will each only be responsible for the taxes on the money you earn, you will both be fully responsible for any debt incurred by the company, including debt taken on by the other partner. So, if a partner takes out a loan that was intended for the business, and defaults, each partner will be fully responsible for the repercussions of debt collections. Even with a good partnership agreement in place, this is hard to avoid when it comes to the law. You'll need to be very particular on who you go into business with and even more particular when it comes to drawing up your written partnership agreement. A good business attorney will be able to direct you on the terms and conditions to be included in this type of agreement.

If liability or lack of capital are a factor in starting your business, a corporation may be the best option to solve either of these problems. A corporation is a standalone entity that is capable of entering into agreements and carrying the liability of running a business. They can also obtain loans and sell stocks of the company to increase capital. Corporations can also sue and be sued should a legal issue arise.

With the ability to limit your liability and gain working capital, there is a price, literally. Corporation can be an expensive and time consuming structure to establish. They may result in much higher taxes being paid, sometimes even being taxed twice. In these instances, the first payment comes when to corporation itself is taxed, and again when the stockholders pay taxes on the dividends received from the corporation, which are not allowable corporate deductions.

Along with expensive start ups and higher taxes, a corporation will usually limit your control, as they rely on a board of directors to make decisions on important issues. They also are required to comply with regulations set forth by federal, state and even some local agencies, which can require extensive paperwork for each, which could take away from time better spent on other business duties.

Advantages and disadvantages can be seen in each of the structure available for your business. You will only be able to determine what is best for your company by examining the needs and goals you are working toward. Start by determining the direction you would like to go, then decide which of the structures will allow you to accomplish this successfully, with the least amount of worry or concern.

Before you finalize your structure, you may want to consult with a business attorney and/or professional accountant. They can give insight into the field in which you are pursuing and recommend the best fit. Most of these professionals offer low-cost or no-cost consultation in hopes of obtaining you as a client.