So, you want to set up a business and start your life as an entrepreneur. But before you can enjoy running your own venture, you have to lay the groundwork for your empire. One of the crucial things to settle from the get-go is the type of business setup you want.
In this article, we’ll discuss the types of setup available for people in the business. We’ll also delve into the factors you need to consider when deciding on which one is the best for you.
Factors to Consider When Choosing a Business Setup
Here are a few factors to consider when choosing a type of business ownership for your upcoming venture.
- Startup Costs. It’s crucial to know how much you’re willing to shell out to start the business from the get-go. Most people only think about the main capital needed to hire people or buy an initial inventory. However, setting up a shop requires a lot more, and you should allot funds for licenses, permit, etc.
- Rights and Duties. This factor isn’t much of a problem if you’re planning to be a sole business owner. If you have partners, however, this can get a bit more tricky. You need to settle if all partners or members will be willing to take the same level of rights and duties in the business. In the same vein, you should also agree if you prefer to have the firm managed by one or all of the partners.
- Organizational Structure. Having the right org structure can gear a business to achieve its goals. On the other hand, employing an arrangement that doesn’t work for ventures within the industry can immensely stunt business growth. The three main types of org structure are functional, divisional, and matrix. Take the time to learn more about these structures to help guide you as you create the blueprint for your business.
- Taxation. Varying types of business ownerships follow different tax rules. So, it’s crucial to know how each type pays taxes or requires its owners to pay taxes. Being familiar with these matters from the start will help you make an informed decision about the best model for your business.
- Financing. Some business types attract investors better than others. This is a crucial point to consider If you’re looking into accepting investments from venture capitalists in the future.
Types of Business Setup
Here are the types of setups to consider when building your business from the ground up. Take note of each owner’s primary function, taxation process, pros, and cons to help you select the best option that could work for your venture.
If you’re looking for the simplest way to form a legit business, this option is for you. This type of business is an extension of the owner. For example, the owner has access to all the assets of the business. But at the same time, the owner is also accountable for the losses and debts of the venture.
There is no distinction between the owner and the business when it comes to finances. Because the company is not considered separate from the owner, there is no risk of double taxation.
- As mentioned above, a business of this type is the same as its owner. Because of this dynamic, the owner has complete control over what goes on in the business.
- Perhaps one of the top benefits of this setup is the ease of establishing one. Setting up a business under this category requires minimal cost, mostly spending tor licenses or permits. Thus, it’s a choice option among micro ventures.
- Compared to other structures, this business type requires an easy tax filing process. The business doesn’t incur taxes as a separate entity. Added to that, the tax rate for this option is also the lowest.
- One thing that can scare off business people from this structure is the unlimited liability that comes with it. There is no separation between the owner and the business from a legal point of view. Due to that, the owner is liable if someone sues the company. In the same vein, the debt of the company is also the debt of the owner.
- It’s more challenging to find an investor for this setup because it can’t issue stocks. Similarly, banks are strict when granting loans to sole proprietorships due to the risk of not being able to pay if it fails.
Not all people are ready to take on a business on their own. If such is the case, you might want to set up a general partnership with one or more individuals. In this setup, all the partners share the assets as well as the profits of the business. In the same vein, they also share the burden of running the venture.
In a general partnership, each partner pays their income tax return. They should include the income of their business on their income tax returns and at the same time, deduct losses incurred by the venture. The setup makes filing easy because all the taxes “pass-through” to the partners, meaning, there’s no taxation to the enterprise itself.
- As mentioned above, the taxation system of this setup is of its pros. The pass-through system prevents double taxation.
- This setup type is also simple and flexible. The partners can agree on each one’s rights, duties, and other arrangements.
- This type of business system is not expensive to establish. The paperwork and formalities are minimal compared to corporations.
- Liability is one of the main reasons why some people may veer away from this setup. The debts of the business are also the debts of the partners.
- In the same vein, if the business falls into debt because of a partner’s decision, all the other partners will suffer the consequence. Due to this dynamic, many general partnerships find it hard to look for investors.
LLC stands for Limited Liability company. As implied by its name, this type of structure protects owners from liabilities. An LLC can be a single-person LLC (with only one owner) or a multi-member LLC (with multiple owners). Just like a corporation, the duration of an LLC’s business can be perpetual. In the same vein, a business can also own another company, and it can also issue stocks.
Many people choose LLC because it prevents a business from getting tax twice. Unlike other set-ups, LLCs can select from three ways to pay income tax. One of these options is to pay taxes as an S-corp.
Here are some of the benefits of choosing an LLC structure for your business:
- One of the top benefits of an LLC is the protection it provides for its owners or members. In case someone sues the company, the owner or members are safe from legal action or lawsuits.
- In the same vein, the owner or members’ assets are deemed separate and are thus protected no matter what happens to the LLC.
- Last but not least, an LLC offers a credible image not only to clients but also to creditors.
- An LLC is considered a pass-through entity. Due to this, the owners have to pay taxes for their LLC income share. The rule holds whether the members received disbursements or not.
- LLC owners can’t file their personal taxes until the LLC sends K-1 forms out. Because of this process, many investors aren’t keen on investing in LLCs.
LLP stands for a Limited Liability Partnership. As the name suggests, the partners have limited liability, meaning each one isn’t responsible for another partner’s actions. In the same vein, if the business fails, creditors won’t go for each partner’s personal income or assets. This is a choice set up for wealth managers, law firms, and accounting firms.
Just like an LCC, the law doesn’t require an LLP to pay income taxes by the IRS. However, filing an informational tax return is required. Also, as a flow-through entity, partners of an LLP receive untaxed profits. However, they are required to pay the taxes themselves.
- Similar to an LLC, one of the main pros of an LLP is that it frees partners of legal liabilities. For instance, if someone sues the business, partners don’t have to be personally liable.
- Just as partners can’t be legally liable, they also don’t have to be financially liable should the business go in debt. However, the law may forfeit this protection in the case of fraud.
- Another benefit of LLP is its flexibility. The partners of the business are free to agree about their duties and rights on their own.
- Just like other business setup options, there are also some disadvantages to this structure. First, not many venture capitalists are willing to invest in an LLP because all the shareholders are required to be partners.
- LLPs aren’t required to treat partners equally. Depending on the agreement, one partner may have more power than others. This means that partners with more shares can control the business direction.