How to Choose an Organizational Structure
Starting a business can be a daunting and overwhelming task. Acquiring funding and deciding on a name are just two aspects of setting your business up to succeed. Determining the organizational structure of your business--a sole proprietorship, partnership or corporation--should be the starting point of any new business venture, because it will have liability and tax implications.
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Create your business plan. Business plans are important in determining your current and future goals. Business growth and expansion are important to consider when deciding on the type of business structure for your business. The Small Business Administration, SBA, offers business plan advice on its website, www.sba.gov.
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Assess your ability to handle risk. Organizational structure has an impact on the amount of risk you assume. Sole proprietorships--the structure most often used for business start-up, according to the SBA--and partnership structures place the burden of liability directly on the business owner or owners. Organizing your business as a corporation can help shift the burden of liability to the business and reduce the impact to personal finances.
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Evaluate tax consequences. Income generated by your business will be taxed based on the structure of your business. Sole proprietorship and partnership structures report income from the business on personal tax returns. This can make tax season easier for accounting purposes. Corporation structures often incur higher taxes, according to the SBA, but they also have more deduction possibilities to lower tax responsibilities, such as employer-provided health-care and dividend payments.
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Seek help. Before deciding on a business structure it's often necessary to discuss options with a trained professional. The Small Business Administration can offer guidance, while accountants and lawyers can help address the tax and legal ramifications associated with specific organizational structures as they relate to your business and industry.
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