This is the step where I need to select an organization structure that best fits my business model. I personally find there is no "best" structure for all businesses. However, I normally prefer to select one that provides me with high autonomy and low tax liability. Again, this will also depend on the national, federal or local tax structure for each business entity in the country or state I conduct my business.
Before setting up my company, I would do insight research on all the options available for my particular business model, particularly the advantages and disadvantages of each formation, paying special attention to the tax implication and government formalities as well as red tape in the location or country where I operate. I never assume all countries are similar.
Let's take a look at four common forms of business ownership:
1. Sole proprietor
2. Partnership
3. Corporation
4. Limited Liability Company
Before selecting the form of business, I always find it best to work closely with a lawyer or a financial planner to ensure I have the right information, compliance and resources that allow me to make the right choice.Sole Proprietor
This is a very popular form of business in many countries (i.e. America, Canada, UK, India, Australia, Hong Kong, Malaysia, etc.) because so little is needed to set up a sole proprietorship. Apart from local business licenses, there are minimal government fees and paperwork. It is instant, cost effective and minimal (or even zero) compliant requirements by local authorities.
On the other hand, there is also considerable risk to consider. The owner's personal assets are vulnerable to creditors and other liabilities. Sole proprietorship doesn't get the advantage of certain tax breaks that are reserved for Corporation or Limited Liability Company.
In short, this form of business is very ideal for home based business that has no massive inventory or a high number of staffs.Partnership
Similar to sole proprietorship, this form is very easy to set up and maintain, requiring minimal government fee and paperwork. The initial setup cost and maintenance fees to run a partnership are very low. Moreover, no capital is required to form a partnership. Each partner is not required to raise any capital to start this form of business.
On the downside, each partner is required to account full responsibility for all the company's debts. If one of the partners defaults on a company loan, creditors can actually go after your personal assets and belongings. Besides that, capital raising is also very limited in a partnership. Just like sole proprietorship, partnership doesn't get much tax incentives.Corporation
There are a few types of corporations available depending on the location or country the owners conduct business. However, most corporations (in many countries) share similar characteristics.
The key advantage of incorporating a business is that it shields equity holders (owners) of the company from personal liability. In other words, if business hits hard times, creditors cannot go after the owners' personal assets to make up for any company debts. Yet, most creditors nowadays would require the owners of the corporation to guarantee the shortfalls if the company goes under. Besides that, a corporation offers significant tax savings (usually not extended to sole proprietorship or partnership), greater business flexibility, company name protection and better opportunity to raise capital via venture capitalist or financial institution.
Bear in mind that corporations are not cheap to set up. It requires some initial set up fees and certain amount of regular maintenance. With a corporation, you have to keep a proper set of financial records, audited by a certified accountant. Depending on where the business is conducted, some government or local authority would require a minimum set of compliance and would also require regular fees to be paid.
There is one option that a corporation possesses - that allow owners to sell their shares of stock to the public (known as public listed corporation). Then this will involve higher startup capital (usually runs into the millions), more legal and meticulous accounting compliances to adhere to.Limited Liability Company
As for many new entrepreneurs, choosing a business structure comes down to liability protection, low startup costing, tax savings and convenience. This form of business requires fewer formalities and less on-going paperwork than corporations while offering the same personal liability protection and tax flexibility. Just as with a corporation, the company name is protected, and the other members of the company are shielded from creditors and other company liabilities such as lawsuits. A limited liability company only requires the owners to keep minimal company records, and there is no limit to the number of equity owners.
Nonetheless, this form of business is dissolved when a member dies or undergoes bankruptcy. In comparison to sole proprietorship or partnership, it has more paperwork and complexity to set up and to be maintained.
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Dave J, is an E-preneur, NLP-Certified Business Coach and Author. Within a decade, Dave J has served as an advisor to countless small-level to high-level business leaders around the world. Despite such a short span, Dave J has becoming a highly-respected authority on the psychology of business leadership, business startup, management and marketing. His forte is coaching ordinary people to attain professional and financial breakthrough.