7 Factors To Consider When Choosing a Business Structure
What is one factor to consider when choosing a business structure?
To help you choose a business structure, we asked business leaders and entrepreneurs this question for their best advice. From considering maintenance costs to consulting a tax professional, there are several things you may want to consider when choosing a business structure.
Here are seven factors to consider when choosing a business structure:
- Consider Maintenance Costs
- Ensure Structure Scalability
- Assess Ownership Preferences
- Consult a Tax Professional
- Examine Decision-Making Power
- Research Industry Regulations
- Think Your Target Market Through
Consider Maintenance Costs
One factor to consider is the maintenance costs of the business. For example, if you are in the US then an LLC is a relatively lightweight model to get started with. Your annual registration costs, registered office, as well as professional fees, should be low. A corporation, on the other hand, may have higher professional fees associated with it. These costs and fees can also depend on the number of shareholders and the complexity of the holdings.
Ensure Structure Scalability
When you're looking at setting up a business structure for your business a key question you need to ask is "can this scale?" So many organizations can find success in the beginning but are unable to keep up that success as they grow their organization. Without a proper business scalable structure, when you start to hire and expand, you'll lose the unique culture you created and make your product or service generic. It's the age-old issue of growing without losing what makes your company special. From the start, take the time to hone your business structure and set it up to scale properly so you don't lose anything special about yourself as a company.
Assess Ownership Preferences
Taking into account and carefully planning the desired ownership structure can limit the complexity of company formation. When the company is built on top of a successful private practice, a partnership may be preferred. When the firm operates in an industry requiring a large initial investment, it is reasonable to structure it in a way that will allow raising capital easily.
Consult a Tax Professional
How a business is structured has an impact on taxation. It is best to consult with your tax professional to determine how the business structure will impact your personal tax situation. A tax professional will also inform you of options of paying each member and any recordkeeping necessary for the business structure selected. One size does not fit all when it comes to structuring a business, and what was beneficial for a colleague may not be suitable for you.
Examine Decision-Making Power
Choosing a business structure as a business owner has many considerations. A very important one is deciding what type of legal entity to use. One factor that can be considered is whether the ownership will remain private or if a limited number of investors would like to share some degree of equity. It's an important consideration of how the company will be structured legally and this goes beyond just choosing between C-Corp., S-Corp., LLC, LLP, etc. The choice could mean more than just determining profit sharing status for shareholders. It may also determine who makes decisions on behalf of the enterprise as well as other governance issues, such as board composition and shareholder voting rights.
Research Industry Regulations
You need to find out if any regulations in your industry can have an impact on the business structure you choose. Some professions and industries have to use a specific structure. Do your research on your industry, the regulations, and laws. If you're able, consult with an advisor.
Think Your Target Market Through
Spend time considering what demographic your business will target. There are simple parameters to think about like age, gender, socio-economic class, location, etc. You should also decide if your business will serve other businesses (B2B) or directly service customers (B2C). Obtain a deep understanding of who your audience will be so you have a substantial foundation on which to ground your business.