2016 has been hailed by many as the year of the entrepreneur. There has never been a better time for people to turn their creative ideas into reality. However, running a business does not consist purely of creative pursuits. When laying their business plans, entrepreneurs must carefully consider their company’s corporate structure. If you are thinking of launching your own business, then there are a few things you should consider when selecting your business entity.
Your Company’s Size
The size of your prospective company is a critical piece of what your business structure should look like. Businesses are subject to different tax obligations and liabilities depending upon their sizes. For example, a one-person operation, such as a freelance web design business, would probably work optimally as a sole proprietorship. Sole proprietorships are subject to self-employment tax. SE tax can seem expensive upfront, but sole proprietorships do not have to worry about other administrative obligations such as business bank accounts, DBA registrations or tax ID numbers. Larger businesses like S corporations do have these obligations, but any inconvenience may be offset by enjoying larger profits.
Another factor in choosing a corporate structure is the level of risk your company incurs in its operations. Sole proprietorships do not offer any risk protection, but in certain situations it is not necessary anyway. Limited liability corporations or LLCs are used most often by owners of rental properties, since they offer protection from the activities of the renters. They are also beneficial for any business with a partnership, because they give each partner the opportunity to officially state and agree to terms.
Do you intend to keep your business small and simple, or do you hope to expand into something larger? This is another important question you need to consider. If you know your business will stay small, then a sole proprietorship may be sufficient throughout the life of your business. Once you take on a partner or incur any risk, you will need to become at least an LLC. Registering as an S corporation offers you the most growth potential, since it makes it easier to brand yourself and to pay multiple employees. You can also use your S corporation status to borrow and deal in your company’s name, which enables you to continually make new investments in your future.
Whether you are running your business from your garage or are about to open your second store, you need to carefully consider your corporate structure. When your business is running optimally, you have more peace of mind and potential for innovation.
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