By Richard Parker
Making the decision to become an entrepreneur is a major one, and once you’ve made it with conviction, all the unanswered questions seem like unimportant details that will be filled in eventually as you continue moving forward. However, there are some fundamental decisions you’ll have to make before your business starts to take shape—and they’ll have a dramatic effect on your business’s chances of success, for better or worse.
For example, choosing your business structure will determine how your company is organized, taxed, and held legally accountable for anything that might go wrong. So what factors should you consider when making this long-lasting decision?
What to Consider Before Moving Forward
Take these factors into consideration before finalizing your choice:
1. Who are you going to consult?
If you’re an experienced entrepreneur, you can probably make this decision on your own. But if you’re new to creating businesses, it’s a good idea to consult with a business lawyer or a similar professional expert and see what they think the best choice for your company will be. You don’t have to follow their advice, but you should listen to their reasoning; they may be able to spot more advantages and disadvantages than you can, helping you make a more logical final decision.
2. How much ownership and control do you want?
If you want to retain full ownership and control over your business, forming a sole proprietorship is probably your best option. Other structures, like C-corporations, may defer at least some decision making to outside sources, such as investors with partial equity in your company or a board of directors to decide the company’s fate.
3. What level of liability are you willing to tolerate?
One of the main reasons to choose an appropriate legal structure is to limit your liability. If you’re a sole proprietor, you could be held personally accountable for anything and everything that happens within your business. However, an LLC or a C-corporation would give you legal protection; in most cases, the business is held liable for damages that come from the business, rather than the individuals who own or operate it.
4. How much time can you put into your business structure?
It’s much easier to get up and running with a sole proprietorship than it is to create a C-corporation from scratch. If you’re eager to get started, you may choose a business structure that requires less paperwork and fewer complexities to iron out. This isn’t the best way to make a decision, but it may be a deciding factor if you’re stuck between two strong options.
5. What tax advantages are most important to you?
Each business structure is taxed somewhat differently. For example, depending on your income level, C-corporations may allow you to have your income taxed at a lower rate than in a partnership or LLC. However, there are dozens of variables to consider here, since there are dozens of forms, rules, and exceptions that apply to each structure.
6. What level of upkeep are you willing to do?
Corporations are the most upkeep-intensive type of business structure, requiring regularly filed paperwork and reporting to maintain operations. The bigger your organization is, and the more shareholders you have, the more complex these regular responsibilities will become.
7. Are you looking for investors?
Speaking of investors, are you trying to attract any to get your business started? If you’re looking to attract investments from multiple people, such as through crowdfunding, or if you plan on issuing common stock eventually, a C-corporation is probably the right choice for you.
Changing Your Mind
You should also keep in mind that depending on which structure you choose and which structure you want in the future, you may be able to convert your business to another type. You shouldn’t rely on this as a safety net, but the option is likely there if you need to pursue it. Spend some time and take the advice of experts as you make the initial call for your business, and you’ll almost certainly start off with the most appropriate structure.
Richard Parker is a freelance writer and author at TalentCulture.com and Readwrite. He covers industry-specific topics such as SEO, small business solutions, entrepreneurship, content marketing, WordPress development, and web design. You can connect with him at Linkedin and Google +.
Related: LLC vs. S-Corp