There are few easy decisions when it comes to your business structure. One of best ways to simplify year one of a new structure is to make it effective at the start of a new year, reducing tax and bookkeeping complications.
Whether you are a self-proprietor performing specialized services, or a partnership that produces goods for others, your business structure needs to protect your personal assets, ensure stability and provide a clear tax route.
Accounting Today has a useful article exploring why structure matters. While a self-proprietorship or partnership may work in the short term, both forms come with limitations. The core ideas explored in the article relate to protection, growth and legal responsibilities.
Both the Limited Liability Company (LLC) and the corporation models provide distinction between individual owners’ personal property and that of the business. Why is that important? If you run into debt – either from your business suffering or because of a related legal concern, like a client slipping on the sidewalk and suing you for injury damages, it’s possible that personal assets like your family home or vehicle might be sacrificed to meet that debt. Both an LLC and corporation make a clean separation between personal property and business property, so your home is safe no matter what happens at the office.
Most investors and clients view LLCs and corporations positively, as a sign of legitimacy that makes them more eager to do business with you. With investment specifically, state laws typically require a third party entity before money can change hands.
Beyond investment, both business structures discussed here encourage the establishment of ground rules for stock options, management disputes and changes likely to occur as the business evolves. In forming either business entity, it’s wise to detail how the company will deal with future challenges, minimizing long-term risk and legal costs if an investor or co-founder wants to withdraw.
When talking business, it’s impossible not to mention taxes. Each business is unique, and every business structure has different rules of taxation. Generally speaking, LLCs are more flexible to different business needs. In an LLC, the business pays the owners. Then owners pay income tax. In a corporation, the corporation is taxed, then owners are paid and also pay individual income tax. There are advantages and disadvantages to both structures.
A strong foundation
Choosing the right model for your business is never easy, but it’s also essential for long-term success. Think of your choice as a foundation, something to build upon instead of something needed for today. Your business structure decisions will guide your growth and, ideally, protect you from unexpected challenges that arise as time goes by.