4 Mistakes To Avoid When Choosing A Business Structure

Business Structure

Starting a business is already an intimidating process by itself. Several things come into play to ensure your business’ success. One of its biggest hurdles is how you can smoothly go through all the legal processes to make your business official, particularly the type of business structure you’ll opt for.

As a building plan or blueprint is to a home, the business structure or entity is to a business. Your business will lack the strength to weather through various business climates when it’s not well-made and well-thought-of. This is an important decision to make, given how the business structure you wind up with affects your business’s tax, operations, and other legal implications.

As you decide on a business structure, you may want to stay clear of committing any of these mistakes:

1. Not Knowing The Different Types Of Business Structures To Choose From

Before deciding on what structure you’ll go for, take a moment to study and analyze all the different types of business structures. For instance, learn the difference between LLC and sole proprietorship, among the other business structures. The more familiar you are with those, the more assured you become that you’re making an informed decision on the type of business structure you’ll opt for.

To give you a bird’s eye view, here’s a brief explanation to differentiate one from the others:

* Corporations are entities whereby the business is separate and distinct from the individual shareholders. This is the best type of business structure to choose if there are multiple owners of the business, each of which seeks to gain profits or dividends from their share or investment.

* General partnerships can either be general or limited. In a general partnership, two or more partners agree to run and establish this business by respecting specific rules in place in the partnership agreement. A general partnership doesn’t need to register with the state or administrative body, unlike a limited partnership. Moreover, in a general partnership, both parties are responsible for all the liabilities that the partnership may incur.

Business Structure

On the other hand, a limited liability partnership is created when there’s one partner identified as the general partner and another as the limited partner, filed with the Secretary of State or your local governing body. As its name implies, compared with a general partnership, the partners in a limited liability partnership have limited liability toward the business they’ve created.

* A sole proprietorship is created when the business has only one owner. This is usually the most common business structure, especially when creating small businesses or young startups.

2. Not Having A Business Plan

Before deciding on the business structure you’ll go for, it’s a must to have a business plan first. It’s wrong to think you can immediately jump to choosing a business structure without your business plan. Putting it together takes a lot of work, but it ultimately spells the difference between a well-thought-out business and one that’s haphazardly made. With the strong competition in various industries today, you’ll certainly want your business to fall under the former.

With that, it’s a prudent move to have your business plan up and ready before jumping right into choosing a business structure. After all, this document evaluates the market for your product, the budget you’ll need to finance your business startup, and the income you expect to make from your business. It’s from your business plan that you can also have a clear and defined idea of the business structure that best fits your plan.

3. Not Considering The Best Tax Treatment

When you draft a business plan, it follows that you’ll have an idea of the type of business plan you prefer to have. Once this is identified, you’ll have to factor in the best type of tax treatment when deciding on a business structure.

For example, not many businesses are ready to be subject to double taxation. However, if you’re a corporation, this is unavoidable. Your business revenue will be subject to state and federal tax, along with the taxes on the personal income you make from the corporation.

While there are legal ways to avoid this, you’ll need a taxation lawyer to help guide you through the process first. That way, you can be certain that whatever tax avoidance strategies you employ are still within the realm of what’s legal rather than potentially going above the law.

Along this line, it’s also necessary to discuss that another tax-related mistake many businesses commit is choosing tax treatment alone. While this matters a lot, it’s not something you should also prioritize exclusively. You can put it on top of your list of factors, but don’t forget to look beyond tax treatment. There are many other important considerations to have in mind, as you’ll be able to gather after reading this piece.

4. Not Being Flexible

Businesses must consider flexibility when choosing a business structure or entity. Flexibility means looking beyond the present. You must study your business well and have a well-defined forecast of where it will be in the next five to ten years.

This is important so you can have proper expectations regarding how your business is slated to change and grow. By taking this into the picture, you’re protected by the fact that your chosen business structure can be pliant enough to welcome those changes. You don’t have to be in that position where you’re faced with added trouble of how your business isn’t equipped to handle your future business growth.

The Bottom Line

As you can see, many factors come into play when choosing a business structure. You have to tick your list of considerations, such as preference, taxation matters, the number of owners, and business size, among many things. Lucky for you, there are many resources you can now make use of to help ensure you’re making the best choice for your business. One of those resources is this one. This awareness of common mistakes ensures you don’t fall into the same pitfalls as many other businesses have done in the past. Now, you can be more certain that your chosen structure is the right one for your business.