One of the first steps of starting a company is to choose a business structure, such as a sole proprietorship, partnership or corporation. This decision has a significant effect on how you conduct your business. Explore the various advantages and disadvantages of the main types of business structures you have to choose from before you make a final decision for your own company.
A company is technically a sole proprietorship by default until the owner takes action to register under another business structure. One of the advantages of allowing the business to remain a sole proprietorship is that you retain full control over the decisions related to the business. You do not have to report to a partner or shareholder. It is also the simplest way to form a company. The downside of remaining a sole proprietorship is that you have to take full personal responsibility for the business, including debts and other liabilities.
When you operate as a partnership, you have someone to share the workload. When operating as a partnership you do not have to treat the business as a separate entity for tax purposes — each partner can simply file his own taxes for his share of the business. The major downside of organizing as a partnership is that both partners still have personal responsibility for debts and liabilities, as is the case with a sole proprietorship. Also, you cannot make certain important business decisions without the agreement of the partner.
A major advantage of registering a business as a corporation is that you completely separate yourself from the business entity. You have limited liability when it comes to business-related liabilities. Also, when you register a corporation it often gives the business a more professional, respected and trusted image in the community. One of the main disadvantages of a corporation is the amount of paperwork you must complete to keep the business on par with state regulations. You must draw up articles of incorporation and stockholder reports. Also, when registering as a general corporation you must file a separate tax return for the business in addition to personal returns as a representative, employee or officer of the company.
Before you contact your state to register your business structure, consult a business lawyer. This is especially helpful if you want to create a corporation. You have a number of incorporation options to choose from — the selection process may overwhelm you if you’re not familiar with the choices. A lawyer can analyze your current situation and your plans for the future to determine the best solution.