Tip: Important factors to consider before liability, tax structure and industry regulations. By creating a list of specific attributes about your company and its founders, you can choose the business structure that`s right for you. In future sections, we`ll look at the possible legal structures a business owner can choose from and look at the pros and cons of each. We start with the simplest of all forms of organization: the sole proprietorship. 6. Operation: The shape of the business unit can determine how it is operated. If you want complete control, a sole proprietorship offers the entrepreneur the highest level of control (and the highest level of potential risk). These are just a few of the considerations that entrepreneurs need to consider when choosing a form of business ownership. Many of these issues require owners to look far into the future of their business and imagine all the “what ifs” associated with self-employment.
While it is possible to change the legal structure once the business is established, the more complex the business processes, the more complex the change will be. In some cases, the complexity of the situation may prevent the owner from making the desired change. If you consider as many of these factors as possible from the beginning, you can save countless hours and high costs. Once your business reaches a certain level, it`s probably in your best interest to integrate it. There are many popular examples of businesses, including: Choosing the right legal structure for your business starts by analyzing your business goals and considering local, state, and federal laws. By defining your goals, you can choose the legal structure that best suits your company`s culture. As your business grows, you can change your legal structure to meet the new needs of your business. There are large differences in the tax treatment of corporations and partnerships or LLCs. For example, corporations pay taxes at the corporate level, while partnerships and LLCs do not.
But income from partnerships and LLCs can be taxed on partners or individual members, even if, unlike shareholders of the corporation, it is not distributed to them. Shareholders or partners may also be liable for self-employed taxes, while withholding taxes are paid by the company for shareholders who are also employees of a company. It`s important to understand the differences in tax treatment between businesses, as taxes can have a huge impact on your business. But tax treatment is only one aspect of the business that needs to be taken into account. You may find that one option is much better than another, or you may decide that other non-tax factors are more important to you. 3. Termination: Some companies automatically terminate in the event of events such as death, partner resignation, or even divorce. In addition, some companies are only allowed to exist for a period mandated by the government. An example of this type of business is Google. In 1995, co-founders Larry Page and Sergey Brin created a small search engine and made it the world`s first search engine.
The co-founders first met at Stanford University while pursuing their doctoral dissertation, then left to develop a beta version of their search engine. Soon after, they raised $1 million in funding from investors, and Google began receiving thousands of visitors a day. With a combined 16% stake from Google, they have a total net worth of nearly $46 billion. Sole proprietorships have the least difficulty getting started – it`s only necessary for you to register the business with the appropriate agency in your state, county, and city. It`s important to note that for any business, how you raise capital is subject to significant regulation, depending on the business unit you choose. While C companies offer the greatest flexibility, raising capital as a partnership is subject to particularly strict rules. A company S offers some of the flexibility of a company C, but its number of shareholders is limited to a maximum of 100. All other businesses must be registered through the local Secretary of State and follow a set of record-keeping rules to maintain limited liability protections. Keeping these records and ensuring the business stays in good condition can be costly and time-consuming, but protection from liability can be invaluable. Few entrepreneurs start a business with lottery winnings or savings worth many years. Many seek financing from a bank, venture capitalist, private investor or credit union to get their business off the ground. Lenders can have one of the biggest influences on the choice of ownership of the business – even more crucial than the preference or ambition of the owner.
Because there is an inherent risk in every business, especially start-ups, lenders often require the business to be structured in such a way that the repayment of funds is best assured (whether the company does it or not). Even long-established companies may be forced to change their legal structure if they seek funds to expand their business.
