How You Structure Your Start-Up Means More Than You Might Think
A business structure is a legal form a company takes to operate. Business structures are important because they determine the way in which profits are taxed and how much liability protection you have as an owner of the company. They also determine the requirements that must be met when issuing shares of stock and whether or not investors will be able to take out loans against their shares of stock. There are many factors to consider when choosing the right legal structure for your startup. These include what type of business you want to run, how much risk you want to take, how much control you want over your business, and how much tax liability you are willing to take on. Whatever the reason, having a good understanding of the different structures will help you decide what's best for your company. How Does a Sole Proprietorship Help Me? A sole proprietorship is the most common form of business in the US. Although some states do require a business license, the sole proprietor does not need to register the company with any government agency or pay any fees. This means that it takes less time and money to start a sole proprietorship than other types of businesses, which can be an attractive option for people who are just starting out. This type of business provides the owner with flexibility, which can be good for a start-up company. However, there are some disadvantages to this type of business. The owner is responsible for all debts and liabilities of the company, which could lead to bankruptcy if they are not careful. How Does an S-Corporation Help Me? An S corporation is a great option for a start-up business. It is easy to establish and maintain, has low administrative costs, and provides some tax benefits. S corporations are pass-through entities which means that their income is passed through the company to the owners and taxed at individual rates rather than corporate rates. Though this type of business entity has many benefits, it also has some disadvantages. The main benefit is that it can save taxes for the owner because it does not have to pay Social Security or Medicare taxes on behalf of the owner. The main disadvantage is that this type of entity cannot issue stock to raise capital, and if you want to sell your shares, you will have to liquidate your company first. How Does an LLC Help Me? An LLC is a good choice for start-ups because it offers liability protection and tax flexibility from their own negligence or that of other members. With an LLC, each member has a limited liability for the debts and obligations of the company up to the amount they have invested in it. Another benefit to an LLC is that it provides tax flexibility. This means that if you are considering structuring your start-up as an S corporation, you should consider an LLC instead. An LLC allows you to pay taxes on your personal income tax return at individual rates (as opposed to corporate rates). When you’re ready to form your LLC, you can hire an attorney to do that for you, or you can save money and do it yourself. There are step-by-step guides to walk you through the process. Be mindful of the rules in your particular state, however, since they do vary from state to state. No Matter the Structure, Keep Good Records The first step in keeping records of your business is to organize the data. You can do this by either using a spreadsheet or by downloading an app that will help you keep track of all the information related to your company. The second step in keeping records of your business is to store these documents and information somewhere safe so they are not lost or destroyed, like storing them online in the cloud. You can keep all related documents in one file by using an online tool that allows you to convert Word, PowerPoint, and Excel files to PDFs. You can use a converter and simply drag and drop those documents into the tool and have all your important data in one PDF file. Check this out to give Adobe’s free converter tool a try. Think carefully about how you’ll be running your business so that you can choose the structure that fits your business best. Then keep careful records and store them safely so that you are protected from any tax or other penalties.