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Despite the rise of big corporations like Amazon and Google, small- and medium-sized businesses (SMBs) continue to adapt, survive, and thrive as the 21st-century business world has evolved.
If you’re amongst the ranks of those aspiring entrepreneurs who already have their own business — or are at least thinking about starting one — here are a few considerations when it comes to choosing a business structure to operate under.
Do Your Research
While it’s tempting to lump all small business owners into identical situations, the truth is, “small business owner” is one of the most diverse terms in existence. You can walk dogs, build houses, run a blog, market other companies, build websites, photograph weddings, or write code and you’d be an SMB owner in each and every activity.
With that said, one of the first things you should do is gather any information that is unique to your particular company’s activities. This will help guide you as you decide on the best way to structure your business. A few questions to ask include:
● What kind of legal liability is related to your business? Will you be operating heavy machinery, typing on a keyboard, or something in between?
● What kind of taxes are required by your nation, state, or local municipality? The specific business structure you choose will likely impact the taxes that you owe.
● How much money do you have to put into establishing your company? Do you need to start cheap or do you have money saved to set things up properly right from the get-go?
● Will you need to hire employees? Employees can quickly complicate things like payroll and taxes and should be planned for in your business structure.
● Will you want to scale your business in the future? If you’re freelance writing now, will you want to stay small or do you aim to manage a full-blown writing agency down the road?
Gathering information about your specific needs can help guide your choices as you structure your business.
Narrow Your Options
Once you’ve gathered your information, it’s time to consider the business structures available and try to narrow down your options. There are a handful of common options, such as proprietorships and corporations, and each has its pros and cons. Start by considering the 7 primary business structures in the U.S. These are:
● Sole proprietorship: This is when you and your business are the same legal entity.
● Partnership: This equally distributes the liability of a business across multiple partners.
● Limited Liability Company (LLC): This helps to protect the liability of a business from the owner.
● C-Corp: This creates an entire legal entity for a business, shifting all liability away from an owner.
● S-Corp: This creates a legal entity that enables untaxed revenue to flow through to an owner where it is taxed (at a lower rate) as personal income.
● B-Corps: This is a business entity that operates in a charitable capacity, like a nonprofit, except for the fact that it is for profit.
● Nonprofit: This is a business entity that focuses on charitable work rather than creating profits.
Each of these business structures and ownership models should be carefully considered as you set up your business. Every situation is unique. For instance, you may save taxes with one structure but create greater liability in the process.
It’s highly recommended that an SMB seeks legal counsel as they choose what kind of business structure to adopt.
As you talk to an accountant or a lawyer, try to narrow down which options you think will work best for you. For instance, if you’re hoping to make a profit, you can rule out the nonprofit option. If you’re going to be working solo for the foreseeable future, you may only need to set up a sole proprietorship for simple activity, an LLC for basic liability or an S-Corp to save on taxes.
The Right Stuff
It’s critical that you make a wise choice to structure your business at this early stage in your startup. This will establish a firm foundation that you can build on without fear. It will eliminate the need to worry about things like filing taxes incorrectly or hiring employees illegally. If you can ameliorate these concerns early in the business-building process, you’ll free yourself up to focus on the area that matters the most: your actual business.