When starting up a business, the most important step is the selection of the right type of business structure. This decision affects various aspects of your business. They include the registration process, personal liability, legal responsibilities, Tax implications, and many more. Hence, the right choice of business structure will help you a lot in long-term growth and success. Every type of business structure has its own set of advantages and disadvantages that significantly impact the business. This article will discuss common business structures and their impact on business registration. With the pros and cons of choosing that specific business type. So that you have complete knowledge of it before choosing a business structure.
WHAT IS A BUSINESS STRUCTURE?
Imagine your business structure as the company’s outfit. It shows the influence of day-to-day operations.
A typical business structure thoroughly defines who owns it.
The contribution of others such as shareholders, partners, and other members. A proper management structure with a business license to make sure that it is a legal entity.
It affects your business in many ways including the required paperwork, tax benefits, and the ability to raise capital funds.
DIFFERENT TYPES OF BUSINESS STRUCTURES:
5 common types of business structures bring fruitful outcomes for companies nowadays. They are:
- Sole proprietorship.
- Partnership.
- Limited Liability Company (LLC).
- Corporation.
- Non-profit organization.
Let’s discuss all of these business structures with their registration processes.
1. SOLE PROPRIETORSHIP:
This type of business structure is ideal for a person who wants to run their business themselves without any other party. A sole proprietorship requires simple steps for its setup. And is a good option for small ventures and home-based businesses. Pros and cons of this type of business structure include:
- It is easy to set up and inexpensive to operate as compared to others.
- You have complete control over your business.
- The tax reporting is very simple as the total income is reported on the owner’s personal tax return.
- The major con is that the owner is personally liable for all the business debts or profits and losses.
- In a sole proprietorship, it is a possibility that the business would cease to exist if the owner is unable to operate it somehow.
REGISTRATION PROCESS:
Since it’s an individual-based business structure, the registration process is not very complex. You need to get the necessary licenses and permissions at the local, federal, or state level.
2. PARTNERSHIP:
A partnership is a type of business structure in which two or more people own the business and operate it. Partnerships can be of three different types:
- General partnership.
- Limited partnership.
- Limited liability partnership (LLP).
Each type of partnership offers different levels of liability protection based on the choice of individuals. Benefits of partnerships include:
- Flexible management structure.
- Partners share the overall responsibility and resources based on the partnership agreement.
- As different individuals have different skills, it helps in the growth and expansion of the business.
- The partnership does not require paperwork with the federal government but with the state government.
- In partnerships, a business does not pay tax on its income. Instead, it is paid through the individual partners’ personal income tax returns.
Drawbacks of partnerships include:
- The major drawback of partnerships is that there is a chance of conflicts and disagreements. But if they are dealt with properly, they no longer are drawbacks. Instead, they can become the source of learning for new business ideas and innovations.
REGISTRATION PROCESS:
Business registration for partnerships will require you to draft an agreement that highlights the responsibilities of each individual and the profit percentage.
You will also have to register with the state authorities to get the necessary business licenses and permits.
3. LIMITED LIABILITY COMPANY (LLC):
It is a type of business structure that combines both the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. Moreover, it also ensures the protection of personal assets.
Advantages of a Limited Liability Company include:
- Because of the independence of limited liability, you are not personally responsible for the debts of the company. Your assets are safe in case of any mishap.
- This business structure provides very flexible management because of the unlimited number of shareholders it can have.
- According to the shareholder’s agreement, every individual gets a different amount of profit based on the funding during the startup process.
Drawbacks of this type of business structure may include:
- Regulatory compliance may vary from state to state which can result in complexities.
- Limited liability company setup may require additional paperwork for maintenance together with the annual fees.
REGISTRATION PROCESS:
Registering a limited liability company’s requirement varies from state to state. But the common steps are:
- Choose a unique name for your company and get the legal documents for it.
- File the articles of organization with the state you want to register your business with.
- Draft an agreement highlighting necessary roles and permits.
- Obtain the Employer Identification Number (EIN).
- You can also create a separate bank account for your company to keep the personal and company finances separate. Moreover, keeping a record of important documents such as financial statements and articles of organization is necessary.
4. CORPORATION:
A corporation is a type of business structure that comes with many complexities such as regulation, record-keeping, tax requirements, and other formalities.
In a corporation, the company is independent of its owners and a separate legal entity. If you have established a medium or high-rank business, you can choose a corporation. Major benefits of it include:
- You can raise capital by selling the stock.
- Even if the ownership or management of the business changes, the business does not cease to exist.
- If you are a shareholder in a corporation, your assets would be safe and secure from the debts of the company.
Some drawbacks of corporations include:
- The major drawback is double taxation. Corporate-level profits and the dividends of shareholders, both have to pay tax.
- You have to keep track of many obligations such as annual meetings, record-keeping, and many more.
REGISTRATION PROCESS:
Company registration in the corporate sector involves the following steps:
Fill out the articles of incorporation with the state’s secretary, highlighting the name and purpose of your company.
Adopt bylaws, issue stock certificates, and elect directors and officers as the part of Incorporation process.
You may also have to co-operate with the board of directors for expert guidance.
5. NON-PROFIT ORGANIZATION:
A non-profit organization is a company that runs for charitable or religious purposes that serve the well-being of others. Non-profit organizations are tax-exempt under section 501(c)(3) of The Internal Revenue Code (IRC).
Pros and cons of this type of business structure include:
- Tax-exempt status.
- Eligibility for Government funding and other donations.
- Strict regulatory requirements to maintain the tax-exempt status.
- Dependency on donations and funding for financial stability.
REGISTRATION PROCESS:
Non-profits need to register with the Internal Revenue Service (IRS) to enjoy tax-exempt status. Moreover, strict compliance with the regulations is highly important. You must have an Employer-Identification Number (EIN) to register with the IRS. It is a 9-digit number that serves as your tax ID to report taxes.
CONCLUSION:
When you are starting up a new business, you should be aware of its different types and structures. Every business structure has its advantages and disadvantages depending upon the requirements. Choosing the right business structure can be a confusing task based on state variations. Discuss your ideas with professional business consultants to get a detailed guide.