Every successful business owner knows that it takes more than a good idea to launch a profitable enterprise. There’s hard work, of course, but there are also countless other details that add up. Among those details are your choice of business structure.
The Commonwealth of Kentucky lists 11 different options for in-state businesses and six for out-of-state businesses. When you’re looking to get started, you might not think too much about the options, but they matter. Why? Well, here are five important reasons to take your choice seriously.
Personal liability
The most common business structure is the sole proprietorship. This is because it’s the simplest and easiest, but it also fails to differentiate between the business and the owner. That means injury claims or debts that target your business can spill over to your personal life and assets.
Other business structures may be more complicated but may separate your business from your personal assets. This means that if something catastrophic happens to your business, you won’t be personally liable.
Tax consequences
This is one of the most obvious issues because it makes itself felt every year when you file taxes. Sole proprietorships, partnerships and LLCs are “flow-through entities,” which means owners report their profits and losses on their personal taxes. Corporations generally have extra tax obligations. They need to consider corporate profits and dividends, but they can offer other tax advantages, such as deductions for business expenses.
Paperwork and compliance
Different business structures come with different filing fees and annual reporting requirements. If you’re going to incorporate your business, you’ll also need to draft your articles of incorporation.
These tasks may appear daunting when you’re just getting started, but it’s important to remember you can get plenty of help with the paperwork. And you don’t necessarily want to choose your business structure based primarily on what’s easy. The last two points should help you better understand the stakes.
Growth and investment potential
If you think your business stands a reasonable chance of real growth, you might want to think about how you’d reach out to future investors. Investors generally favor corporations and other highly structured businesses that offer them some reassurances. These business structures also do a better job of anticipating a division of labor.
If you’re doing all the work yourself or personally overseeing a small team, you might not need anything other than a sole proprietorship. But if your business could grow into multiple states or countries, you might need clearly defined business units and clearly defined duties for the leaders of those units.
The business life cycle
Finally, as Forbes makes clear, you want to think ahead when you choose your business structure. Right now, you may be focused on just getting started, but you are working toward a goal. And that goal is going to come with an end game. Every business has a life cycle, and some business structures are better able than others to deal with the end of your personal involvement with the business.
Whether you want to keep your business in the family, sell it or go public, you will find that your business structure has a big impact, once again, at the end of your business life cycle.
Make an informed decision
Given how much is at stake with your choice of business structure, you want to make sure you understand your options before you choose. An experienced attorney can help you learn more about the ways your structure can help you toward your goals.
The right structure can enhance your business strategy. The wrong one can work against it.