What is a Business Structure?
There are several different types of business structures within the US. Some of them have different perks and benefits which help business owners choose which structure they should use. The three most common business structures are Sole Proprietorship, LLC (Limited Liability Company), and Corporations. There are differences between each that make sense for different business needs.
These structures partially revolve around hierarchy and who controls the business. They are typically also associated with the size of the business and overall operating cost. With the size of the company, they also may employ different amounts of people and have to answer to different employment laws because of it.
What is the Difference Between Structures?
As Joseph Lizyness, a popular angel investor says: “Simply by structuring correctly, companies make it easier for investors to be onboarded quickly – and to be more tax efficient”. A Sole Proprietor is typically run by one or two people. It could be a partnership. These companies are generally smaller businesses and locally owned. One major advantage of having a Sole Proprietorship is that the business owner(s) have total control over the company. This means they don’t need to get approval or discuss their business moves with anyone else. Another advantage is that since these are typically smaller companies, they are sometimes cheaper to run and don’t fall into the same employment laws as larger companies. They also have lower start up costs and the possibility of moving faster through the process.
A LLC (Limited Liability Company) is handled by a group of individuals who need to work together toward making their business run smoothly. There is no limit to the amount of partners that can be involved in a LLC and there are some tax breaks they would be eligible for. These companies are typically mid size and because of this they have a more mid level amount of employees and operating costs. One of the biggest benefits to having an LLC is that you have limited liability protection
The third most common type of business structure is a corporation. Corporations are owned by their shareholders. The shareholders make decisions regarding the business and how it’s run. They create bylaws and roles of directors. The shareholders have meetings to discuss the company regularly. There are many tax benefits that apply to corporations that might not to smaller businesses but there are also some rules that may not apply to other companies that do for them. Corporations have stock which helps them financially as well as the ability to be run continuously. If a business owner in a Sole Proprietor dies or wants to retire, they’d have to either find someone else to run their company, or close. If a shareholder in a corporation dies or wants to retire, the company will still move forward and could get new shareholders to take this person’s place. Corporations typically have to follow all employment laws and are larger companies with many employees.
What is best for your company?
The best business structure would depend on the needs of the business owner. If someone wanted to open a Tshirt stand on the boardwalk, they would only need a few employees and have a lower operating cost. This type of business wouldn’t need a group of people making decisions so in this case a Sole Proprietorship might be best. If someone was looking to open a national chain of department stores, they may be more inclined to choose a corporation to ensure the life of the company as well as collect on tax breaks they may qualify for. Different situations have different needs which is why there are multiple structures to work with. Each business owner would need to research benefits and downsides and make their own decision based on their needs. TRUiC is a website that can help business owners learn about business structures and guide them through the process. Visit their website to see their resources:
https://startupsavant.com/how-to-form-a-corporation
What is the most common business structure?
A Sole proprietorship is the most common type of business structure in the US. The reason for this is that these companies are easier to set up and can be faster to get going because of this. They also offer complete control for the business owner. When someone is starting a new business, they generally want to have control over all aspects of the company. This ensures that the business will run exactly how they want and they’ll be able to nurture it as it grows. Control can play toward a downside as well at the same time. While the business owner can do whatever they want with the company, they are also responsible for all financial obligations and debts. This can play a huge role in their bottom line and they will be held accountable for any issues that come of it. It is best for them to hire or work with an accountant to assist in making sure they are financially stable, but some companies don’t when they are starting out.
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