What Sort of Business Structure Should You Use For Your Business?

You’ve finally decided to take the leap and go into business for yourself. Congratulations! Now that you have the idea and the product or service you’re going to bring to the market, what do you do next? Well, you’ll need to set up a legal structure for your business: sole proprietor, partnership, or corporation.

For most of us, operating as a sole proprietor will be sufficient. This simply means you are the owner, make all the decisions, reap all rewards, and suffer the consequences. It’s the simplest business form. You keep the records for the business and report your net income on your 1040. The down side is you have unlimited liability, meaning if someone sues you, they can go after your personal assets. Be sure you are adequately insured.

A partnership is two or more people sharing in the profits and the expenses. Each partner should bring a unique skill that adds value to the business. A main advantage is liability is limited to each partner’s investment in the business. It is also a way to raise more capital as well as acquiring a skill or contacts you otherwise would not have.

A Corporation is a business structure that allows a company to raise capital from outside investors. The company issues shares of stock that represent ownership in the business. Under this structure, there are unlimited sources of capital from the public. In return, you give up some control in the decision-making as owners elect a board of directors to represent their interests. You still would run day-to-day operations of the business, but major decisions would require a vote from the Board. As with partnerships, liability is limited to the assets of the company.

However, there is a lot more paperwork and regulations to deal with. In addition, it is expensive to organize the company. It’s important to note that you are not married to the structure you initially choose. You can always switch to another structure, or back to the original one as circumstances change.

So, which is the most appealing to you? Let me know!