Structuring a Business
About Business Structuring
One of the key decisions you will make when starting a business is its structure. Your choice of structure will depend on the size and type of business and how you want to run it. Each structure may have an impact on key areas such as tax you are liable to pay, asset protection and costs to set up. There are several structures that you choose from when starting or expanding your business.
Important Factors to consider for choosing Business Structures
Flexibility
Complexity
Where is your company headed, and which type of legal structure allows for the growth you envision? Your entity should b support the possibility for growth and change, and not hold it back from its potential.
When it comes to start-up and operational complexity, nothing is simpler a sole proprietorship, you simply register your name, start doing business, report the profits, and pay taxes on it as personal income. However, it can be difficult to procure outside funding, partnerships, on the other hand, require a signed agreement to define the roles and percentages of profits, corporations and LLCs have various reporting requirements with state governments and the central government.
Liability
A corporation carries the least amount of personal liability since the law holds that it is its own entity. This means that creditors and customers can sue the corporation, but they cannot gain access to any personal assets of the officers or shareholders, An LLP offers the same protection, but the tax benefits of a sole proprietorship. Partnership shares the liability between the partners as defined by their partnership agreement.
Taxes
Tax incidences is one of the important factors that help a business to ascertain which form of business structure is best for a person. Tax though is a compulsory thing to be remitted to the government, but it otherwise reduces the number of profits left with the business.
Control
If you want sole or primary control of the business and its activities, a sole proprietorship or an LLP might be the best choice for you, you can negotiate such control in a partnership agreement as well.
A corporation is constructed to have a board of directors that makes the major decisions that guide the company. A single person can control a corporation, especially at its inception, but as it grows, so, too, does the need to operate it as a board-directed entity, even for a small corporation, the rules intended for larger organizations, such as keeping notes of every major decision that affects the company – still apply.
Capital Investment
If you need to obtain outside funding, such as from an investor, venture capitalist, or bank, you may be better off establishing a corporation. Corporations have an easier time obtaining outside funding than sole proprietorships.
Corporations can sell shares of stock and secure additional funding for growth, while sole proprietors can only obtain funds through their personal accounts, using their personal credit or taking on partners, an LLP can face similar struggles, although, as its own entity, it is not always necessary for the owner to use their personal credit or assets.
Licenses, Permits and Regulations
In addition to legally registering your business entity, you may need specific licenses and permits to operate. Depending on the type of business and its activities, it may need to be licensed at the local, state, and federal/central levels.
Sole Trader / Sole Proprirtorship
Sole Proprietorship
Complexity of Business Structure
Cost
Legal Obligations
Tax Obligations
Separate Legal Entity
Liability
Simple
Low
Low
Low
No
Unlimited
Partnership
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Complexity of Business Structure
Cost
Legal Obligations
Tax Obligations
Separate Legal Entity
Liability
Moderate
Medium
Low to Medium
Low
No
Unlimited
Company
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Complexity of Business Structure
Cost
Legal Obligations
Tax Obligations
Separate Legal Entity
Liability
Complex
Medium To High
High
medium
Yes
Limited
Trust
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Complexity of Business Structure
Cost
Legal Obligations
Tax Obligations
Separate Entity
Liabiltiy
Highly Complex
High
Medium
High
Yes
Limited (with corporate trustee)
Sole Proprietorship
About Sole Proprietorship
Taxation of Sole Proprietorship
Trust
About Trust
Taxation of Trust
Partnership Firm
About Partnership Firm
Taxation of Partnership Firm
Society
About Society
Taxation of Society
LLP
About LLP
Taxation of LLP
HUF
About HUF
Taxation of HUF
Company
Types of Company
Taxation of Company