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How to Choose the Right Business Structure for Your Startup

This year, the United States will receive over 69,703 applications for start-up businesses. Over the years, the country has become known as one of the most startup-friendly countries in the world.

As the country welcomes a new batch of entrepreneurs and start-ups, each one of them will be contemplating the best business structure for their enterprise.

When setting up a business, any new entrepreneur must take the time to consider their business structure options- and the merits of all of them.

Each business structure can come with its federal regulations, tax implications, and legal boundaries. From your tax deadlines to your legal responsibilities for lawsuits, here is what you need to think about when choosing a business structure.

How Important Is Liability Protection to You?

Some business structures like sole proprietorship come simplified but also do not have separation from their owner. In other words, the business has unlimited liability. On the bright side, this means the owner is entitled to all of the business’ profits.

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However, it also means that you would be on the hook for all of its losses which can extend to your personal assets. Therefore, if you fall behind on your bills or file for bankruptcy, the creditor’s reach can extend to your personal possessions like home and car.

Incorporating yourself as a limited liability company, on the other hand, means the liabilities you are responsible for are limited to the value of your investment in the business. This, in turn, protects your personal assets. Be sure to make yourself familiar with your state regulations on LLCs, however.

Each state sets its own regulations for taxation according to the IRS. This determines whether your LLC would be treated as a partnership or corporation for tax purposes.

If you prefer complete separation and no personal liability, one option may be to register as a corporation. A corporation is entitled to enter into contracts and face legal litigation separately from its owners.

However, the 2 types of corporations (C and S corporations) both come with strict requirements on classification. For instance, an S corporation can also be liable to double taxation.

Weigh the Advantages And Disadvantages

The business structure you choose will also have long-standing tax implications since each business structure has different tax treatments. One of those implications is your tax filing and payment dates.

If you choose to register your startup as a sole proprietor or limited liability company (LLC), you have until July 15 to file and pay your taxes.

Limited liability companies also have flexibility when choosing their taxation structure for the year. They can either opt to be taxed as sole proprietors or corporations.  However, partnerships are required to file their tax returns by March 16 every year.

One thing you should consider is how these tax dates align with your business’ proposed accounting period. You should also consider the location of your business and individual state laws.

Alaska and South Dakota are known to be some of the most favorable states for starting an LLC thanks to their lower than average corporate tax rates and favorable business climate.

Opportunities for Growth and Capital Funding in the Future

Different business structures also have differing outlooks for growth prospects and more importantly, raising capital for business expansion plans. On one hand, corporations allow you to raise finance through public stock issues in the future if you choose to.

Sole proprietors and partnerships do not have this option and often are limited to applying for business loans or credit finance.

Some lenders can also see sole proprietors as a higher risk when considering credit applications so you may find that you have additional business loan application requirements to fulfill.

Conclusion

The key to choosing the right business structure for your startup is to spend time understanding the different models. Spending time doing research and weighing the implications of each structure is the only way you can make an informed choice.

If you do find that you need more information, it may be time to reach out to a company attorney and accountant.

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