How to Pick a Business Structure: 5 Questions to Ask about Your Entity

Entrepreneurs who set out to build a business from the bottom up have to learn many lessons along the way if they want to be greeted with success. Of all those lessons, perhaps the most important is learning how to pick a business structure. And it’s critical that they choose correctly the first time. A business’s legal structure not only determines its tax status but also the business’s ability to raise funds and the owner or owners’ personal liability.

All fledgling business owners have a personal set of circumstances that they need to consider before choosing a legal entity, so while one entrepreneur might choose to structure his business as a partnership, another won’t necessarily gain the same benefits from such a decision.

Would-be business owners have to choose between four different structures—partnership, as mentioned above, sole proprietorship, limited liability company, and two types of corporation. If you’re not sure how to pick a business structure that will serve your purposes, ask yourself these five questions.

Is liability protection important for my business?

Some legal structures offer liability protection to business owners, which means that those owners are not personally responsible for paying damages for lawsuits or court judgments. When your company handles large contracts or has invested heavily in equipment, liability protection is a must. Consider the risks that your company takes when doing business to determine whether liability protection is something to worry about.

How can I minimize my business taxes?

The legal entity you choose for your business determines how the IRS will tax your company, and some structures offer better protection for different circumstances. For instance, if you choose to incorporate, you can avoid the double taxation that a C corporation must submit to by choosing to incorporate as an S corporation. However, to qualify for the S corporation structure, your business must meet certain conditions.

What are the costs?

While some business entities, such as S corporations, might offer lower taxes, there is a tradeoff. The costs of incorporation and administration of your business can outweigh the savings you get from the tax status you gain. For example, keeping proper records and filing paperwork can force business owners to spend most of their time on administrative tasks, which might force them to hire extra help for other tasks. With an umbrella insurance policy in place for liability purposes, you might be better off structuring your business as a sole proprietorship.

Do I need a flexible business structure?

Figuring out how to pick a business structure is about more than the financials. A business structure should also take into consideration the needs of the individual owner or owners. Not everyone has the same goals for their company, and those goals will help determine the amount of flexibility that you need.

What are the future needs of the business going to look like?

What will your business needs be in three years? Five years? Ten years? What will happen to your ownership in the business if you die or are no longer capable of running it? These questions should cross your mind at some point during your time as a business owner, hopefully before you choose its legal structure. Most business owners are geared up and ready to hit the ground running, but it’s critical to stop and consider whether the structure you’ve chosen is good for your business not only now but also in the future.

How to pick a business structure? Call AM Law!

Not sure what how to structure your small business? We can help. 305-441-9530