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What business structure should I choose when starting my Company?

Guest post by: Stan Prokop

Article Overview: The article highlights the business owners choice in selecting a legal ' style ' of business for legal and accounting and personal goal basis .

What business structure should I choose when starting my Company?

When we ask most business owners why they start a firm the majority of the time the answer is of course to ' make money ' or enhance personal wealth. When people start their business they are faced with the choice of ' organizing ' their business in several manners. These are called ' legal ' or ' business' 'structures '.

The factors that affect the final decision in this matter are as follows:

Business complexity

Personal liability

Tax issues

Essentially there are three choices the business owner focuses on. The first choice is a ' Proprietorship '. In a proprietorship the owner owns the business. He gets all the profit, or income, and also is responsible for all losses. Lets repeat that, ' all losses ‘!

When a business owner chooses proprietorship all his personal assets are at stake. There are, to counter balance that risk, many benefits of a proprietorship, one of which is very limited regulation re government, etc. The profits of the business are simply put into the owner’s personal tax return and he or she pays taxes on that income. One of the reasons people don’t always choose a proprietorship is the fact that the business can't be sold, per se. additionally, lenders prefer to deal with corporations, not people. (They still take guarantees from people though!)

Next down the line in business choice is PARTNERSHIP. This of course is simply 2 or more individuals. Similar to our proprietorship scenario all profits are split between the partners, and, guess what, they are responsible for all losses. In more sophisticated partnerships, a LIMITED PARTNERSHIP is formed which can limit the liabilities of the owners. Naturally lenders would focus on how their loans will be paid in this type of partnership, as no personal covenants are provided. Similar to our proprietorship scenario raising capital is a challenge.

Our final entity is, of course, the CORPORATION. A company is viewed by the government, and lenders, as a separate legal entity. It’s just like an individual so to speak. The company owns the assets, and the owners of the company have no liability or the debts of the firm. Naturally if a lender has requested personal guarantees, and they have been provided, then that's a different story. Companies find it easier to borrow and raise outside capital. Companies can, of course, ' go public'. The company pays its own taxes of course, on profit it has generated.

All business owners should assess which choice of ' structure' best suites their personal and long term goals.

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Article Tags: business structure, incorporation, starting a business



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