4 Things to Keep In Mind When Deciding the Legal Structure of Your Business
When launching a new business idea (5 Business Ideas to Run from Home), one of the first decisions you’ll have to make, along with choosing your company name (Why’s a Good Company Name So Important for Success Plus 3 Tools to Brainstorm One), would be the legal structure of your business. Believe it or not, the word ‘Inc.’ that young entrepreneurs so love to add to their brands these days, actually means a lot more.
Many small business owners do not completely understand the importance of a solid market research (Understand Your Market 5 Things to Research Before You Start a Business) and selecting the legal form that most closely matches the particular needs of their businesses. It makes no difference whether you’re starting an online business, a retail store, or even a consultancy, you’ll have legal obligations toward the province and the government, and their extent will depend on the choice of your business structure.
Make sure the structure of your business provides the most benefits. You can select between a sole proprietorship, partnership, a corporation, . Here’s what to keep in mind when making this important decision:
- Your Personal Liability
If you’re running a business where personal liability and risking your own assets isn’t a big worry, – like for example, offering a small service where you don’t have big investments and you’re unlikely to get sued, – it’s probably best to choose sole proprietorship or a partnership, depending on whether you run the business solo, or with partner(s).
Every business must start someplace. But as you grow you would want to register as a corporation, as this form of business is completely separated from its owners, meaning their assets can’t be jeopardized if something goes very wrong and the corporation gets sued or suffers losses. The personal liability you face is very limited with this business structure.
- The Amount of Tax Money You Pay
A sole proprietorship is the simplest business structure with great tax benefits. If your business is organized in this form, the expenses and the profit you earn from the business are included on your personal income tax return. The same goes for a partnership.
Of course, if you can handle the higher costs for filing corporation income taxes, registering your business as corporation may get you lower income tax rates and the ability to carry back or carry forward losses. However, incorporating your business may also involve significant licensing fees, or in some cases double taxation – once on a corporate level, and then again when the profit is distributed to shareholders. Look for a solution that best suits your business needs on this matter. Always talk to an accountant or tax professional.
- Ability to Raise Capital
Corporations’ greatest advantage is their ability to raise money. They are much more attractive to banks and investors, have much greater potential of capital sources, th
ey can sell stocks, common or preferred, to raise more funds.
For a sole proprietorship, raising capital can be very difficult. Banks and other financial institutions are hesitant when it comes to borrowing to sole proprietors, and they’re mostly dependent on personal financial sources, savings, home equity, or family loans.
- The Pile of Paperwork Your Business is Required to Do
The amount of accounting, tax preparation, and documentation required to run corporations is their major downside. They must follow some more complex rules and regulations, so you may need the services of an attorney or accountant to guide you.
Partnerships can be more complex, and expensive, to establish than a sole proprietorship, as it requires more legal and accounting services. On the other hand, you’ll have to do the least paperwork if you run your business individually as a sole proprietor.
The conditions on the market, and these laws and regulations, are all subject to changes. Make sure to reassess your business structure from time to time, so you can be certain the legal form of your business is always the best fit for your needs.