How Does Organizational Structure Help a Business?
Out of several decisions to make, one of the most prominent decisions business owners has to make is to choose what type of organizational structure their business is going to use. It’s probably the most important decision relating to the type of legal structure you select for your company. This decision won’t just impact how much taxes you pay. Still, it will also affect the amount of paperwork required to do business and even the personal liability you face and your ability to generate money.
As a business owner, one of the first business decisions you will make is deciding between the several types of business structure. Making such decisions can really be influential for your business. But choosing between different types of business structures can really be intimidating and confusing. But each business structure has different tax policies, income, and liability implications for business owners and other companies.
Types of Business Structure
The reason behind business opting for varied business types changes from country to country. The reason behind the structural changes relies on socio-cultural peculiarities and the existing law system of the country. However, generally, there are six types of business structures: sole proprietorship, general partnership, limited liability partnership, limited partnership, limited liability company, business corporation. What business structure types owners will choose depends on factors such as income, taxation, and liability, which need to be considered? Each business types have advantage and disadvantages that make it empirical for doing business in some circumstances but not in others.
- Sole Proprietorship: It’s the most common type of business structure. Generally, only a single individual conducts business for himself. Only one individual owns and operates the business. If you are willing to work alone, then a sole proprietorship is recommendable for you. It’s the least complex type of business. Unlike other business structures such as general partnerships, business corporations, or LLCs, sole proprietorships don’t have to register with state business entities filling offices before commencing business operation. The tax filing for sole proprietorships can really be appealing as all expenses, profits, and losses are included in your personal income tax returns, form 1040. Your profits and losses are recorded on Schedule C, which is filled with 1040. After that, “the bottom-line amount” from schedule 7C is then transferred to your personal tax return.
- Partnership: Partnership is the second most popular type of business venture. Two or more individuals own a partnership business. A partnership business is formed when two or more individuals agree to run a business. Each partner has an equal share in net profits and losses. Like sole proprietorships, in partnerships business, each business partner shares their income details on their personal tax returns and pays employment taxes to the IRS. Partners are liable for the financial debts and the company’s obligations, and even their partners’ actions. Partnerships can be categorized into two categories: General and Limited partners. In General partnerships, the partners manage the company and assume responsibility for their debts and other obligations. A limited partnership business structure has both limited and general partners; general partners own and assume the partnership’s debts and obligations, whereas limited partners only serve as investors. They don’t have any control over the business.
- Corporations: A corporation is the most complex and expensive type of business venture. Its operations are governed by law. A corporation business gives you the strongest protection from personal liability. Hence, it’s more complicated than other business structures. A corporation business could be a good option if you plan to expand your business and add shareholders.
Some of the advantages of corporation businesses are discussed below:
- The investors aren’t liable for corporations’ obligations.
- Capitals can be raised anytime by selling stocks and securities.
Disadvantages of corporation business enterprise:
o It’s the most expensive business to form.
o Its complex to operate
- S Corporation: S corporation business is more attractive to small business then rather than regular business. This is because S corporation offers attractive tax benefits and still provides the business owners with liability protection. Income, losses are shared between the tax holders and includes in their personal tax returns. S corporation businesses can have up to 100 shareholders; this makes it possible to have more investors and incur more capital, tax experts maintain.
- C Corporation: C corporation has a separate legal entity that files its own tax returns. Owners should split their ownership by using shares of stock.
- Limited Liability Company: Limited liability business mode is the most flexible type of business structure. That gives you the advantage of sole proprietorships, corporation, and partnership business structures. LLC business structures share business and personal liabilities. All owners share tax responsibilities. Unlike other business structures, LLC’s are not liable for their business debts.
- Cooperative Business: The Cooperative business model combines the best of all small businesses and enterprises. It also includes the commonwealth creation and reflects the community interests, likewise small business. It also provides governance, the potential for longevity, and limited liability, the same as cooperation.
Prior to Choosing your Business Structure Type
Prior to selecting your business type, make sure that the desired business model provides the maximum benefits and is the best structure for your business. Prior to selecting the desired business model, consider the following factors.
- Legal Liability
- Future Needs
After you select your desired business model, check out the state website for the latest laws and policies, and register your small business. Consider contacting lawyers or professionals to get started. If you are planning to operate in several states, determine how other states will treat a business established in another state. Remember, the favourable circumstances or make you settle for a business structure are always subject to change in the laws. It’s recommendable to reassess your business structure from time to time to ensure that you are using the business model to reap the most benefit.