Starting a business has a lot many prospects attached, which need careful decision making and extensive research. One such major decision is selecting the legal business structure of your company. Legal structure has a direct impact on the taxes you pay; it proportionately affects volumes of paperwork required in the process. Business structure is a crucial phenomenon as it also influences your personal liability and plays with your ability to generate capital. Business structure has to be decided upon carefully in accordance with the nature of the business and the market in which it operates.
Types of business structures
The two most common business structure types are:
- Subchapter S Corporation
- Limited Liability company (LLC)
S Corporations and LLCs have some similarities but are also different in many aspects.
Similarities Between the two:
- Limited Liability Protection to the owners
- Pass through tax entities
- Impact the personal income tax returns of the owners
- Eliminates the possibility of the double taxation error
Dissimilarities Between the two:
- S Corporations allows the ownership of no more than 75 owners
- LLC allows unlimited owners/ members
- LLC can have non- US citizen shareholders but S Corporations cannot
- S Corporations are sole bodies, these cannot be owned by other corporations, trusts or LLCs
- LLCs are free bodies and are not subject to these ownership constraints
Selecting the Business Structure – A crucial task
Many entrepreneurs are not comfortable remaining sole entities and therefore demand a legal protection that is missing in the concept of the sole proprietorship. Such a decisions of framing a business structure of S or C corporations or the LLCs has to be taken very carefully as it is directly proportional to the success and profit rates of the company.
Following are the tips that one must consider before making a business structure decision:
- Considering the advice of a good CPA
Since these decisions are long-term decisions it is always important to be all ears to what a good CPA has to say. The norms to change the structure of a company once formed are highly complex. Thus, it is important to choose the structure wisely. A good company structure will help in earning long-term profits and providing unbeatable security for the personal liability.
- Liability protection is unlimited
The liability protections provided by the structures are limited. One has to understand that this protection does not provide any security against criminal acts, and frauds. Such acts are subject to legal procedures and investigations.
- Obtaining the local Business licenses
Incorporating does not mean that while operating you merely forget the local business norms. Incorporations have to be made in coherence with the local guidelines.
- Completing the paperwork and tax payments well in time
A company’s operations have to be maintained for smooth functioning. Ownership updates, any changes in the corporate officers and the tax liabilities have to be duly reported to related authorities. Not performing these tasks can have serious consequences, exhausting their resources on unwanted errands.
- Ensure sufficient capital
Lack of capital will not allow proper functioning of the business organization. It is important to make the analysis of the amount of capital needed. Make sure the company has enough capital assets to perform its functions.
A proper financial advice a helpful measure in the long-term as it helps generate a correct business structure for the organizations, which is in accordance to the culture and embodiments of the company. This helps the organization reduce the costs and unwanted flow of capital.
Business structure is one of the most important components of any company, as it directly influences the working patterns, and profitability of the company. Therefore, it has to be chosen wisely.