What is the right Business Structure?

 
 

What is the right business structure for my business? Developing an idea and turning it into a business can be both an exciting and overwhelming experience. One of the starting decisions you need to make is choosing the business structure.

It’s not a light-hearted decision to make because it affects a great part of the future of your business. From taxes, to profits, debt, and paperwork, everything relies on your chosen business structure.

Types of Business Structures

In business as in life, you can go solo or in partnerships. You have four main business structures to choose from, sole proprietorship, partnership, corporation, and co-operative.


Why go for sole proprietorship?

  • Less paperwork, fewer costs, and greater freedom;

  • Tax advantages as a self-employed and all income is your personal income;

  • If the business is a success you can always include partners or incorporation in the future.

 As good as it sounds, there are a couple of bumps along the road to the sole proprietorship; 

  • Banks are reluctant to finance sole proprietorships, so you might reach for personal savings, family loans, etc. 

  • In the case of business losses and debt, you can get your assets and property seized as your assets and actions are those of the Sole Proprietorship.

 

Partnership

The fundamentals of the partnership are two (or more) people starting a business and agreeing to:

  • share the losses and profits of their business;

  • contribute with money, skills, and labor;

  • have a saying in the decision making; 

  • each partner can act on behalf of the business.

 Why are partnerships preferred?

  • They’re inexpensive to set up; 

  • You have support no matter the outcome;

  • In case of failure losses get split among partners. 

 Partnerships can be a success when partners share the same passion and responsibility. Finding a reliable partner, in the long run, can be a tough job. 

Verbal agreements are no guarantee for the future of your business. That’s why signing a partnership agreement is a good step to protect everyone involved.

 

Corporation

Corporation as a business structure is an independent legal entity, separate from its owners. It’s not as common choice for new or startup businesses because:

  • This structuring costs can be more expensive;

  • Requires more attention in complying with regulatory requirements;

  • A legal counsellor is recommended to set up the structure and lead you through the accounting and tax regulations and almost always requires the services of a qualified accountant to work with you and the corporation.

 The corporation is set up with a number of shares, which get divided between the owners, determining the ownership structure. Shareholders can sell shares as a way to fund future project’s development.

 The greatest benefit of this structure is the protection of your assets. A corporation’s debt will not put your assets at risk in most cases. A corporation lives on even in the case of disability or death of any of the shareholders or directors, which makes it easy to sell or pass on in the future.

 

Co-operative

The co-operative business structure is an alternative business structure set up by an association of members or businesses.

 This structure is set up to meet the needs of their members, not to maximize the profit of the shareholders.

 The co-operative’s advantages include:

  • limited liability;

  • earnings get split among members;

  • equal saying in decision making –one member equals one vote;

  • each member is an owner and operator – in case it’s an enterprise every employee is an owner.

When choosing a business structure it’s important to consider the long term effect.

The cost of administration, the legal liability, tax implications, and the flexibility for a possible switch to another structure are all crucial for the future of your business. If you have questions please contact us today!

By Karuna Beckmann

 
 
BusinessStudio Lothair