The Importance of Corporate Structure
The wise selection of your corporate structure is an important part of the lifelong health of your company. This is because the structure or entity you choose for your business has a direct impact on the allocation of revenue, the liability you are subject to, and the size your company can reach.
Allocation of Revenue
Companies of different sizes have differences in their tax obligations and in their administrative needs. People who are self-employed under a sole proprietorship must pay self-employment tax on certain types of income. This can cause budgeting headaches, so if your company is large enough it may be a wise choice to file as an S corporation. S corporations can administer payroll through W-2s, so any taxes owed are withheld from paychecks. S corporations are also exempt from corporate taxes, unlike C corporations. C corporations do have advantages for larger companies though, because the tax write-offs available to them can save a significant amount of money.
Businesses whose services or facilities do not carry any inherent risk are often safe as sole proprietorships, which offer no liability protection. However, most businesses are subject to some level of risk, and this is when other corporate structures should be considered. For example, the owner of rental properties should register as an LLC in order to protect his or her business from being sued because of any actions on the part of the renters. LLCs and other entities that offer asset protection also offer protection to business partners. They give partners the space to lay out the terms of their business agreements. They also protect the shares and interests of each partner.
Business structures have an influence on the growth potential of their businesses. For example, a sole proprietorship must stay relatively small in order to keep its risks to a minimum. For some business owners, this may be the desired situation, but others may wish to grow into a larger business. To that end, S corporations enable business owners to accrue business credit and then borrow money and conduct transactions under their business name. This means businesses can make major purchases as investments in their own progress.
Choosing the right corporate structure is a series of cost-benefit analyses. If done correctly, it can not only save you money, it can also fuel your growth. Be sure to research all available types of entities in depth and consult with financial professionals in order to make the optimal choice for your company.