What types of business structures are there?
Aspiring business owners and entrepreneurs will have to get familiar with the different kinds of business structures that exist. These dictate the rules and governing of your business and determine how the enterprise will be run. It’s absolutely crucial that you pick the right type of business structure that caters to your needs and the needs of the company you wish to expand.
The most common forms of business structure include sole proprietorships, partnerships, and various types of corporations. Which of these you choose will depend on a number of different factors, so it would be best to get familiar with each of them.
This is one of the simplest and most straightforward forms of business structure. One individual owns and operates the company with complete control. There are quite a few benefits that come with this type of structure.
The tax aspect is especially appealing. You can include expenses from running the business on your tax returns, which can be very helpful in reducing the amount you have to pay. At the same time, you can also write off some losses from running the business, since you personally invested in it. This can help you in situations where the business losses offset your earnings from other sources of income.
On the other hand, this also means you take on the business’s liabilities as well. Should things take a turn for the worst; your assets will be used to satisfy debts that your company owes. This can be bad news if you invest a little too much into the business.
In many cases, several individuals will claim ownership of the business. If you intend to run your business with equal standing, you might want to consider using a structure akin to a partnership. There are two different kinds of partnership structures.
The first one is a general partnership. Every individual has an equal stake in the company and takes care of the responsibilities of running it. At the same time, they also assume responsibility for debts and liabilities.
A limited partnership is a bit different. They cooperate with the sole proprietor or partners but do not take on the same responsibilities. In essence, they act as investors for the company. Limited partners have no control over the company, nor do they share the liabilities or debts that the general partners do.
Smaller businesses might not benefit enough from partnerships for it to be a worthwhile structure. They require a lot of paperwork and funding to be created. This might not sit well with smaller enterprises. Every partner can take out loans and make investment decisions on behalf of the partnership. Every other partner is also liable for the debts that this incurs, which can be detrimental to every party if an individual decision goes wrong.
Corporations are a complex and expensive business structure. They require extensive paperwork and legal compliance to be functional. You can think of corporations as separate entities from their owners. The corporation is independent in a legal sense, which provides its owners with quite a few benefits.
For one, you don’t put your own assets at risk when forming a corporation. It has its own assets that are used to create investments and pay off debts. Best of all, you can retain some of the profits made from the corporation without necessarily paying taxes for them.
Corporations also come with a lot of downsides. Owners are obligated to pay a double tax on the business’s earnings because they include the payments made to shareholders, which are taxed at individual tax rates for each shareholder.
It’s also incredibly difficult to manage a corporation’s finances. Between the legal paperwork and different business laws that vary from state to state, you’ll need the assistance of a lawyer just to get your business off the ground. To make matters worse, working out the taxes of a corporation can be a nightmarish task, especially in states like NSW. It’s nearly impossible to do without professional help. Finding an experienced tax agent in Glebe shouldn’t be too difficult, though. Find one that specializes in business and you’ll make the job a lot easier. Only once you have your accounting sorted can you even consider making proper investments.
S corporations are slightly different from regular corporations but come with similar benefits and downsides as the latter. They come with the liability protection of a regular corporation, which means personal assets remain safe in the case of piling debt and bankruptcy. Income and losses go through shareholders which means there’s only one type of tax included. One specific thing about S corporations is that they are allowed to use cash accounting methods instead of accrual, which makes the process much simpler and requires less help from an expert.
Unfortunately, these types of businesses also come with some downsides. For starters, owners must file the same kind of paperwork and pay the same costs as they would for a normal corporation while enjoying fewer benefits and protections. S corporations can only issue one kind of stock that can only be purchased by individuals, estates, and trusts. This limits the ability of the company to raise capital and expand the business.
Deciding on a business structure is difficult, especially when you consider the many types of structures available at your disposal. They all come with benefits and drawbacks that can make or break your business, and even your personal finances, depending on how you run it. With this in mind, it’s important that you do your due diligence and figure out which type of structure would be ideal for your business. Keep the above pointers in mind and you’ll be able to easily make a decision.