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The 3 Basic Types of Business Structures for Startups

Confused about what type of business structure is best for your startup? Here's a guide on 3 of the basic types of business entities for your business.

The 3 Basic Types of Business Structures for Startups

This topic will be discussed with the following structure.

A good business structure lays the foundation for success. When starting a stable business, you’ll need to decide how to structure your company. 

The structure matters because each one comes with tax and legal responsibilities, limiting or exposing you to risks and opportunities. It also defines your corporate organization, giving you a clear idea of everyone's roles in moving the business forward.

Although choosing your business structure is a big deal, know that it doesn't have to be a permanent one. Your startup is likely to grow with the right people and the right decisions. 

So a startup legal structure may not work for your expanding business down the line.

For now, the following are your options.

Sole Proprietorship

A sole proprietorship is the most basic type of business structure where only one person runs the business. That single owner has all the decision-making abilities in the business and is also liable for everything that’s happening in it. 

Sole Proprietorship

If you have no intention of running a large corporation or a more involved business process, this could be the best choice for your business.

You have full control over your business, but you also have sole liability. When your company is faced with a financial problem, your personal assets are exposed. 

For example, you may have secured the best mortgage rates for some of your real estate assets, but payments for them could be compromised because you'd need to pay off debt for your business out of your own pocket.

Advantages:

  • Easy and cost-effective to start
  • Fewer papers to file
  • No unemployment tax (for the owner)
  • You can mix personal and business assets
  • Tax returns can be reported on the owner's personal statement
  • Easy to build and operate

Disadvantages

  • Personal liability when it comes to losses, debts and other business-related issues
  • Difficulty in raising capital; sole proprietors are also not typically eligible for government funding

Limited Liability Company

Limited Liability Company (LLC) is the most popular business formation for startups and small businesses alike. It’s a mix of sole proprietorship and corporation with the goal of growing a small business. 

So there are a number of benefits that a corporation would have without the formalities like that of a small business.

Limited Liability Company

For example, an LLC owned by just one person will automatically be taxed as a sole proprietorship. It makes it an ideal choice for those who are planning to have a bigger business in the future, but not as complicated as a corporation.

Advantages:

  • Unlike a sole proprietorship, profits and losses are being reported separately, and are reported on the individual return. It avoids double taxation and saves money.
  • Business isn’t fully liable for debts and other legal issues.
  • Unlimited number of shareholders
  • Other people, besides the owner or member, can be brought in to manage the company.
  • The profit and loss (P&L) distribution doesn’t have to abide by a constricted structure and is more flexible.

Disadvantages

  • Not able to issue stock. This will make it harder to raise money by selling shares.
  • Harder to incentivize employees. Stock options can’t be offered to employees, as well as the cost of benefits can’t be deducted.
  • LLC members should pay for medical insurance and SSS, which will lead to more taxes.

Corporation

The highest level of major business entities are corporations or sometimes called C Corporation, which is used by large businesses. You’ll experience more regulations and a quite less ideal tax structure. 

Corporation

But, this is the only business formation that can issue stock in different classes. If you plan on railing investors in to raise money, this is the entity for you.

Advantages:

  • Corporations have the power to continue business even after the death of the owner or founding member
  • Ownership can be transferred easily in accordance with the law
  • Stocks can be sold either publicly or privately
  • Has the same advantages as LLCs and more
  • Corporations have been around for a long time, so they have a solid legal history that can guide owners

Disadvantages

  • More expensive
  • More annual fees are required
  • More operation formalities need to be followed

Consult with Professionals

Choosing the business entity is the first and one of the most important steps in pushing through with your new business. The business formation you choose will influence the daily operations of your business.

Consult with Professionals

Consult with legal professionals or tax professionals when making your final decision so that you get the right balance of benefits and legal protection.

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Zoe Sanders
Zoe SandersMember since
Jul 09, 2021
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