Often times people tell you there are certain business structures that are “better” than others…that is only true when you consider how it will impact your own particular business and your needs. All business structures have their advantages and disadvantages. The key is to look at your own business and determine the structure that will best serve your needs in 3 specific areas.
If someone tells you they know the best business structure for you, be cautious in following their guidance unless they specifically match what your needs are in these 3 areas. If they match what you want to achieve in these areas, then there is a high likelihood it could be a good structure for you to consider. Here are 3 areas we recommend you consider when thinking about an initial or new business structure.
3 Areas to Think About with Regard to Your Business Needs
The first area many think about is TAXES. And for good reason…this is a critically important consideration for any business. The more you can save on taxes and reinvest in your business the stronger it will be and faster it can grow. Taxes are a significant consideration when it comes to your structure.
The different type of business structures focus on different advantages and different incentives when it comes to taxation. Certain structures, such as Sole Proprietorship, LLCs, and Partnerships are designed to report income on the individual’s personal return. The income earned from these businesses will be taxed at the individual’s rate of taxation. Of course, the appropriate business deductions will still apply and aid in reducing the overall income reported.
On the other hand, a company who uses a “corporate” structure is treated as a separate entity, not an individual entity so their taxes are paid separately from the individual’s taxes. Any money the individual owner takes out of the business as salary or incentives would then be taxed on their own separate tax return. There are different types of corporate structures, such as a C-Corporation and an S-Corporation. Even though they are both corporations, they treat taxes differently so it is important to speak with your attorney and tax advisor on the advantages.
Taxes are a huge issue and can be greatly affected by the corporate structure. The best thing any business owner can do is to fully evaluate where they are today and where they want to go in the next 5 to 10 years and then determine the best corporate structure that can help minimize their taxes as they achieve their goals. However, there are 2 other issues you need to consider before jumping into deciding on your structure.
With any business, one of the key functions of the owner or leadership is MINIMZING RISK. Being able to effectively manage your risk down to a very low level is a key responsibility of any leader. Understanding your current level of risk or assessing what things could increase your risk are important before determining your business structure.
For example, some structures, such as a Sole Proprietorship, put the risk on the individual at the same time there is risk to the business. There is little, if any, personal risk protection beyond what you might have as an individual. Other structures, such as an LLC (Limited Liability Corporation) were designed to help offset the personal risk and assign it to a separate entity. And other corporate structures, such as a C-Corporation can help distance the individual even further from the business risk.
But regardless of your structure, your goal should always be to minimize risk wherever possible. To help you assess where you might have some excessive business risk, we have a RISK ASSESSMENT tool that can be a great place to get started. The other thing you will find extremely helpful is to sit down with your business lawyer and discuss where you are and where you want to go. They should be able to highlight some key areas to review to help keep (or lower) your current business risk. If you don’t have anyone to talk with, we can meet with you (complementary of course) and explore where you are and let you know some areas to be aware of with regard to risk.
The third area to consider with regard to the appropriate business structure is COMPLEXITY. There is no question that certain structures require much more work to manage than others. For example, with a Sole Proprietor structure there is just you…no one else you have to answer to (unless it’s your spouse) when you are making your business decisions. Compare that with a full Corporation structure and you could even have a Board of Directors who want to help you out.
Part of picking a structure is determining how much additional input you need and want. Each structure has different requirements (by law) that have to be met. Understanding what these are and how you want to deal with them has influence over your type of structure. While this might not be the ultimate determining factor for your structure, it could cast a swaying vote if all things are pretty much equal with some of the other structures after you do your analysis.
Some owners/leaders want more control and some want less. This should be something you are open and honest with yourself about prior to picking a structure. If you’re the type of person that really doesn’t want to answer to anyone else, this should be a factor in your decision.
What to do next…
If you are not sure about the type of legal structure you need (or want) we would recommend doing the items discussed above. We created a simple way for you to better understand your current risk situation might look like (which every business owner wants) with our Risk Assessment Tool. We’d also be happy to meet with you (complimentary of course) to discuss your business and personal situation further and give you some insights about how you might want to proceed.
If you better understand where you are with regard to these 3 areas, you can better decide on what best suits you and your future business. We created Your Concierge CounselSM specifically for the purpose of helping business owners with questions just like this one. If you would like to learn more about this, we would be happy to share how this would work for you and your organization…just ask.
I hope you have found this helpful and given you a different way to look at your business. If it has, please share this with others inside your company and your colleagues who are running or leading other businesses. Our primary mission at Generations Law Group, LLP is to help everyone find productive ways to lower their business AND personal risk. This is just one way you can start to do this…but it will tell you a lot about you and what has happened over the past few years with regard to your business risk. Let’s make sure your risk is as low as it can be while you continue to grow.