Figuring out the best structure for your business can be challenging and time-consuming. Often, it involves going through all sorts of complicated documents on accounting sites to try to work out the best formula.
The good news is that there are better approaches. Simplifying what you learn can help you see through all the complexities and land on a strategy that works for you and your firm.
So, what should you consider?
The Business Type
The first thing to consider is the type of business you want to run. Any company that sells products or uses debt should generally look at company structures that limit liabilities. That’s because you don’t want any firm you set up to wreck your personal finances and leave you short-changed.
By contrast, you might get simpler tax treatment if you choose sole proprietorship or partnership models for service businesses. These let you avoid some of the accounting complexities of C-corps and S-corps, simplifying matters greatly.
The Number Of Owners
You also want to consider the number of owners. Some business structures are easier to set up if you have more people.
Obviously, if you have partners, you’ll want to opt for a partnership. However, you might also want to set up a limited company if you’re using debt or selling physical goods.
Sole traders are best for companies that you alone run. Holding these in your name lets you avoid the tax implications of moving money from a separate firm to your bank account.
The Liability Protection
When you begin your IRS EIN application, you’ll also want to consider liability protection (as discussed above). Defending yourself against downside risk is essential, especially if you’re planning to take on debt.
Liability protection prevents creditors from coming after your personal possessions in the event your brand goes out of business. You can protect things like your home while still taking risks with the money inside the business.
(Note that if the business does fail, you won’t get back any of your invested capital. That’s gone).
The Tax Considerations
Perhaps the most important factor to consider is the tax. How much you pay will often decide the structure you want to use.
The differences between different tax regimes can be substantial. Most people with higher revenues get their businesses taxed as separate entities because of the lower corporate tax rate, but not always.
That’s where hiring an accountant can help. They can tell you how much tax is likely to be under different scenarios, and which option most companies in your industry choose.
The Growth Potential
Finally, you’ll want to consider the growth potential of the structure for your business. A corporation is a separate legal entity and offers the strongest protection from creditors. Despite being expensive, it is an excellent option for entrepreneurs looking to reduce risk.
If the growth potential is lower, then you’ll want to look at alternative structures. Creating businesses under your own name can be an excellent way to lower startup costs and see where things go before investing more.