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What Business Structure Should I Choose?

The first step to starting a business can be a little tough and somewhat frightening. However, if you do your best and adopt an honest approach, you are more likely to push ahead and succeed. You don’t have to attend courses, seminars, or conferences to help you decide whether to set up your own business. Your vision, faith, willpower, passion, and determination to move forward are what really matter. You also need to know about the product or service you plan to sell.

Choosing the right business

Sometimes deciding to set up your own business is the easy part. Choosing what kind of business might not be so simple. The global marketplace is a vast universe with millions of different types of companies. How do you choose the best one for you?

It must be a business that:

  • you feel passionate about,
  • you know well,
  • has good long-term prospects,
  • is known to be profitable, and
  • has a marketplace that is big enough to welcome one more competitor (you).

You must also be absolutely sure that it is a business to which you will give everything you’ve got. In the history of commerce, companies that have succeeded have done so because their founders were willing to make personal sacrifices.

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If you set up a company as a half-hearted hobby or simply as something to keep you a little bit more occupied, it will most probably fail within a few years. According to the SBA (Small Business Administration) in the United States, only between 45.4% and 51% of new businesses survive for more than five years.

The vast majority of those that failed consisted of totally dedicated entrepreneurs. So, imagine what chance you would have if you did not give it your all. There is no room in today’s fiercely competitive marketplace for semi-dedication and pseudo passion.

Business structure matters in achieving goals 

Every successful entrepreneur has had and probably still has dreams. Dreams give us hope, direction, and ambition. However, when approaching a new business, we also need a giant dose of realism, pragmatism, and level-headedness.

Determining the right business structure or corporate structure for your enterprise helps you lay down your short-, medium-, and long-term goals and objectives. Your goal is where you want to be in, for example, five years time. Your objective is how you want to get there. In other words, your goal is your destination while your objective is the journey you take to get to that destination.

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A business structure defines an organization’s category so that it is legally recognized in a specific jurisdiction. Non-profits, corporations, holding companies, partnerships, limited liability companies, and subsidiaries are examples of business structures.

The term ‘business structure’ also includes ‘organizational structure,’ i.e., a system to define a company’s hierarchy. Each worker’s position and duties are defined, as well as who they report to and who reports to them. Organizational structure describes the relationships between employees, supervisors, managers, and directors.

This article focuses on business structure when it refers to the organization of a company regarding its legal status:

Types of business structures:

Partnership:

In business, a partnership is an agreement by at least two people or other entities (such as companies) to run a firm as co-owners. In other words, it is a business with at least two owners. Each partner has invested in the business and is liable for its obligations and debts.

There are three main types of partnerships.

  • General partnership: all relevant parties, i.e., partners, are equally involved in profits, losses, obligations, and duties related to the business. The partnership agreement lays out in detail who each partner is and their involvement in the business.
  • Limited partnership:limited partners are not liable for their personal assets. In other words, if the business goes bankrupt with huge debts, they only lose what they put into the business. Their private homes, bank accounts, and other personal assets are safe.
  • Limited Liability Partnership: this type can only be created by professionals such as lawyers, dentists, doctors, accountants, and architects. The personal assets of these partners cannot be used to pay business debts. However, they are liable for personal acts of malpractice.

Sole proprietorship:

In this type of company, the owner has complete control of the business. Anybody who runs a business that has not been registered is automatically considered as the owner of a sole proprietorship, i.e., he or she is a sole proprietor.

The business is not a separate entity from the owner. In other words, the company’s obligations and assets are also the owner’s obligations and assets.

If the company goes bankrupt with huge debts, its creditors will try to seize the owner’s personal assets such as his or her house, bank accounts, vehicles, etc.

If you set up a low-risk business, this type of structure could be a good option. Further down the road, when your company is bigger, you might consider changing its structure.

Limited liability Company (LLC):

In this type of company, the owners are only legally liable for its debts to the extent of the money they invested, i.e., the capital they invested in the business.

LLCs are hybrid companies in that they combine the characteristics of both a corporation and a sole-proprietorship. While the liability of the owners are limited, as is the case in a corporation, an LLC is eligible for a partnership’s or sole proprietorship’s pass-through taxation feature.

Random Stuff I Do says the following about this type of business structure:

“As the LLC is not considered a separate entity, the company does not pay taxes or take on losses. Instead, this is done by the owners as they have to report the business profits, or losses, on their personal income tax returns.”

“However, just like corporations, members of an LLC are protected from personal liabilities, thus the name Limited Liability.”

Corporation:

In this structure, the business is legally a separate entity from its owners. A corporation can have profits and is legally responsible. It pays taxes as an entity in itself.

In the legal systems of the United States and some other nations, corporations offer the best protection to their owners against personal liability. However, they are considerably more expensive to set up compared to the other corporate structures.

If you set up a corporation, remember that you are legally required to publish accounts periodically.

When a corporation needs money, it has more options than other types of businesses. For example, it can sell shares.

Below is a list of some of the most famous corporations in the United States:

  • Microsoft Corporation
  • Apple Inc
  • JP Morgan Chase
  • General Electric
  • General Motors
  • Citigroup
  • Berkshire Hathaway
  • Ford Motor Company
  • Bank of America
  • Wal-Mart

There are several types of corporations including B Corporations, C Corporations, S Corporations, and Closed Corporations.

We often refer to a business that is run by a state government or charity as a non-profit corporation. Non-profit corporations provide educational, charitable, recreational, and social services to people in the community.

Conclusion:

As you can see, there is a wide choice of business structures available. Which one you choose when you set up your company depends on your aims and some other factors. Is it a low-risk business? Do you plan to set it up and run it on your own? Do you have enough capital of your own or do you plan to borrow or find partners and backers?

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