Advantages and Disadvantages of Different Company Structures
People say the first step is always the hardest. This especially applies in the business world. Starting a new venture is no walk in the park. However, you get what you worked for. The reward in owning a business is unmatched. You get to be your own boss! If you work hard and smart enough, you’re on your way to making some serious cash.
But first things first, you have to start things right. Consider your goals and understand how each company structure works. There are several structures out there that have worked for small businesses and giant tycoons alike. In this blog post, you’ll learn about each one and find the best that sits well with your vision and plans.
What Is Company Structure?
A company structure is a system that organizes a company and determines actions it will undertake to achieve its goals. These activities generally consist of the rules, roles, responsibilities, and liabilities of everyone in the company. That being said, the four main structures in the United States include sole proprietorship, partnership, corporation, and limited liability company.
Sole Proprietorship
A sole proprietorship is the simplest and most inexpensive structure to start with. It is a business owned and operated by a single person. One of the best things about this is you have total freedom over most of your business dealings and, of course, the income. Choosing this is also relatively cheap since you only have to pay minimal fees. In most cases, only the operating license fees and business tax are necessary for you to operate.
Speaking of obligations, having a separate business income tax to your personal one is unnecessary since the business and the owner exist as a single legal entity. You will only need to file a Form 1040, including Schedule C for profit and loss and Schedule SE for self-employment tax.
Perhaps the biggest downside of being a sole proprietor business is that you will personally be liable for all the debts, obligations, and liabilities.
Partnership
A partnership is a business that two or more people own. One of its most significant advantages is that you won’t need a large capital to start since the investment is shared. Moreover, you would have control over the plans without needing the boards’ approval — only your partner to discuss things with. Both parties are responsible for the business’ profit and loss depending on their share of the enterprise.
Like sole proprietorship, the business is not a separate legal entity from its owners. It is still considered one. Each partner must pay self-employment tax and records of profit and loss under Schedule K-1 under Form 1065.
On the downside, disagreements may occur in this type of structure. Conflicts between you and your partner can cause severe delays and even the fall of your company. It is essential to find a partner you can trust wholeheartedly to avoid the worst.
Corporation
A corporation is a more complex and expensive business venture. Unlike the two previously mentioned, corporations have more tax requirements and regulations since more people, money, and consumers are involved. Oftentimes, you will need to hire attorneys to make sure the registration process abides with the state laws.
There are two major types of a corporation; C-corporation and S-corporation. C-corporation has a separate legal entity from its owners, while S-corporations can have up to 100 shareholders, which operates the same way as a partnership.
A significant advantage of a corporate structure is its ability to raise capital. Companies do so by offering their shares of stocks to the public. With more money, a business can expand quicker, making more income depending on how they handle the business.
Limited Liability Company
A limited liability company (LLC) is a structure that features a mix of both corporations and partnerships. In an LLC, the owners are not personally liable for the company’s debts and liabilities. It is also generally easier to set up an LLC than a corporation because it requires less tax and legal requirements. Also, there is no limit on how many shareholders an LLC can have compared to S-corporations with quantitative restrictions.
But LLC is far from perfect. When registering for one, you will be required to document and file articles of association with your state. Depending on where you set it up, the process can be expensive since you may need to hire an accountant and an attorney to ensure you comply with all of the requirements.
Final Thoughts
Starting a business is no easy task. But it pays to be informed! Understanding how each structure works allows you to make the right decisions to help you make your dreams a reality.