Building your business and brand is exciting. Your big idea is becoming a reality. You’re landing your first customers.
Naturally, some less exciting things, like your business structure, take a backseat. But, don’t dive too deep into operations without choosing a well-fitting one. Your business structure lays the foundation for your company’s future, affecting everything from your legal liability to taxes and business valuations.
Picking the right one for you isn’t just a formality. It’s a decision that can either help or hinder your success.
Many entrepreneurs don’t realize how impactful deciding on a business structure is from the beginning. It’s not impossible to change later, but it does require extra time and steps. Taking the time now to understand your options and align your business structure with your goals will save you headaches down the road.
Picking a business structure doesn’t have to be overwhelming. Here are some helpful business structuring tips from a Charlotte CPA firm.
Choosing the proper structure matters more than you think. It affects multiple areas of your business life, like
Selecting a structure without fully understanding it could expose you to more taxes than necessary, lawsuit threats, and lost investors or partners.
For instance, if you operate as a sole proprietor, you and your business are legally the same entity. Your personal assets could be at risk if your business runs into legal trouble.
In contrast, forming a limited liability company (LLC) can offer you protection by legally separating your personal and business liabilities. That separation provides peace of mind that a lawsuit against your business won’t automatically threaten your home, car, or savings.
What’s more, the right business structure can improve your tax situation. Some structures, like an S corporation, allow profits (and some losses) to pass directly through to your personal income without facing corporate income tax. Choosing the optimal structure could result in significant tax savings over the life of your business.
When evaluating business structures, it’s essential to understand each option’s pros and cons. Here’s a brief overview:
Selecting the right one requires you to assess your current situation and future plans honestly. A freelance graphic designer operating alone will have different needs than a startup founder seeking venture capital. A business growth consultant who understands business structures and accounting can help you pick the most fitting one.
Thinking through the elements in the guide below can help you match a structure to your unique goals.
First, what’s your risk tolerance? If your business involves significant financial or legal liabilities, you’ll want a structure that shields your personal assets, like an LLC or a corporation. Some examples of careers that fall into this category include:
On the other hand, a sole proprietorship might be sufficient (at least at the beginning) if you’re freelancing part-time with minimal overhead.
Next, consider your plans for growth. A corporate structure might serve you better if you anticipate needing outside investors or hope to take your company public eventually. Corporations make issuing shares and attracting venture capital easier. Sole proprietorships and partnerships can be more limiting in this regard.
Finally, think about taxes. Different structures come with different tax consequences.
Sole proprietorships and partnerships offer simplicity in that the income they generate goes on your personal tax returns. Corporations may provide advantages like retained earnings and greater flexibility with deductions.
Consider consulting with an accountant or financial advisor. They can help you model potential scenarios and choose the most tax-efficient option.
Looking at examples that could happen in the real world can help you better understand how important the right structure is.
Suppose you’re opening a boutique coffee shop. You might start as a sole proprietor to keep paperwork simple. However, shifting to an LLC as you grow, take on employees, and open new locations could provide the liability protection you need as risks increase.
Now imagine you’re developing an app and plan to seek investors. Forming a C Corporation would likely be your best move, as investors typically prefer to fund C Corps due to the clear shareholder structure and scalability.
Alternatively, if you’re launching a local consulting firm with a partner, a partnership agreement paired with an LLC structure might give you the flexibility and protection both of you need.
The biggest mistake is rushing the decision without fully understanding the consequences. Choosing the easiest option today without considering your future needs can limit your flexibility and cost you more in the long run.
Another common error is not revisiting the decision as your business evolves. The structure that made sense when you started might not fit as your business grows, expands into new markets, or takes on partners. Set a yearly reminder to review your structure to stay aligned with your goals.
Lastly, many entrepreneurs fail to get professional advice before choosing a structure. While there’s plenty of information available online, every business is different. Spending a little money upfront for legal or financial guidance can save you from expensive mistakes later.
Your business structure is more than just a legal formality. It’s a strategic tool influencing your taxes, legal protections, and growth opportunities. Taking the time to pick the proper structure now lays a strong foundation for your success and saves you from unnecessary hurdles in the future.
Confidently choose a structure that supports your vision by evaluating your risk tolerance, growth plans, and tax situation. And rest assured, it’s never something you have to decide on alone. An accounting professional can guide you. Your future self and your business will thank you for it.