If you are starting a business or thinking about changing how your current business is set up, it is important to consider what you want the corporate structure to look like. Factors to think about include how large you envision your company growing, how many other people you want to have ownership of the business, and which tax arrangement makes the most sense for your company. Here are some common business structures and some advantages and disadvantages of each.
In a sole proprietorship, one owner is responsible for the financial gains and losses of the company. This structure is popular with people who run businesses from their homes, such as tutors, babysitters, and people who make and sell crafts online. Sole proprietorships are easy to set up and run. However, they offer no separation between your business and personal finances.
Limited Liability Companies
A limited liability company allows a company to have multiple owners and protects those owners’ personal assets from the company’s debts and liabilities. You might have to pay a fee to establish an LLC, with the fee amount depending on which state you are in. LLCs come in a wide variety of sizes, from small businesses to large organizations such as Pepsi-Cola and eBay.
This type of corporate structure is run by two or more people. Everyone might have an equal stake in the company, or there might be one person in control with partners who contribute a smaller amount. One thing to keep in mind is that each partner is responsible for the professional debts of the other partners, even if not all partners were responsible for accruing those debts.
A corporation is separate and distinct from its owners and can enter contracts, borrow money, and can sue and be sued on its own. There are several types of corporations, including:
- C corporations, which may have an unlimited number of investors
- B corporations, which strive to make society a better place in addition to making a profit
- S corporations, which generally consists of small companies
Corporations offer continuity in the event of an owner stepping down or passing away.
In a co-op, the owners are some of the customers, who vote on things that have to do with the company. Co-ops may qualify for federal funding, and their user-owners may be eligible for discounts on products and services.
Consider the advantages and disadvantages of each business structure and plan accordingly.