Structuring Your Small Business: What Is the Right Option for You?

When many people start a small business, they do not have a good understanding of business structure. As a result, they may select the default structure - sole proprietorship. This choice is functional for most businesses, especially small businesses. However, there are types of businesses that are better served by other structures, e.g. corporations and limited liability companies. If you are thinking about starting a business, or if you already have started a business, then you need to consider your options and see if your business is structured in the best way possible.

Question 1 - How Big Is Your Business?

The size of your business is going to impact which business structure is the most functional. Businesses that are bringing in less than $50,000 to $100,000 a year are usually well served by the sole proprietorship or partnership structure. Once your annual income surpasses $100,000 a year, however, the financial vulnerabilities that the business faces can make it necessary to restructure the business.

Question 2 - How Many Owners Are There?

If there are multiple owners of a business, then a partnership structure is the better option for a small business. A partnership structure will spread the financial obligations and rewards between the invested parties, as well as spread the professional liabilities that the business has between the invested parties. At the end of each year, a partnership tax return will be completed which will produce worksheets for each partner that divides the income and tax liability from the profits and losses incurred by the partnership based upon the shares in the company that each partner has. For example, most partnerships will be 50-50 partnerships, but sometimes the partnerships can be 60-40, 70-30 or 80-20.

Question 3 - How Much Risk Do You Want To Be Exposed To?

Another issue that can impact which business structure you should select is the amount of personal risk you want to be exposed to. When you are in a sole proprietorship or a partnership, then your personal assets can be put at risk if your company is sued. For many small businesses and home-based businesses, this is not a big concern. However, for law firms, medical practices and investment agencies, the chances of being sued or being held professional liable for oversights and mistakes are great. In these situations, incorporation is a good option. This process helps to segregate professional assets from personal assets during legal actions.

Question 4 - How Much Money Do You Have Available for Structuring Your Business?

The final factor that is going to impact which structure your company selects is the amount of money that it has for the structuring process. Individuals that have a limited budget often opt for sole proprietorship or basic partnership structures. Those that have money set aside for the structuring of their company can invest in the incorporation process.

Sources:

http://www.irs.gov/newsroom/article/0,,id=183918,00.html