Have You Built the Optimal Corporate Structure?
Your corporate structure has a profound effect on your overhead and your company’s operations. That’s because the structure you adopt when filing your business paperwork with the state and federal government will dictate the way your company’s income is taxed, the way legal liability for the company’s actions work, and even the responsibilities that shareholders have to one another. Before your new business files official paperwork to start operations, it’s worth asking whether you’ve built the optimal structure to support your fledgling business. If you decide you need to change later, it will be possible to dissolve the company and reincorporate, but it can be expensive. It helps if you choose the right corporate structure from the beginning.
Sole proprietorships are very effective for entrepreneurs because they allow you to consolidate your business taxes and personal taxes using Schedule C. If the sole proprietorship has an EIN, then it is possible to have employees, offer benefits, and so on, but the business owner will not need to be an employee under this structure. In fact, it is simpler if the owner is not. If the business owner will be a regular employee, you might find the independent tax entity and liability limitations offered by LLC structure more beneficial. LLCs can be either sole proprietorships or partnerships, and you can file LLC paperwork and then elect for taxation as a sole proprietorship if you wish. Most do not, however.
Partnerships provide entrepreneurs who do not want to file LLC status with a way to create a limited business endeavor with a specific purpose while retaining their own individual tax responsibilities on the income they receive from the partnership. Many business advisors and management consultants recommend filing LLC paperwork over partnerships in most situations, but there are many reasons why companies choose not to do this, ranging from cost to specific requirements of the project at hand.
Considering all these options before filing your business incorporation paperwork allows you to make the right strategic decision for your company. The right decision now might not be the right decision in the future, though. Businesses change as they develop, and one reason reincorporation exists is to provide companies with the opportunity to reposition themselves as their business realities change. Remember that, and don’t worry too much if you find that five or six years from now, you do have to try out a new corporate structure. Just make the best decision you can make for your business today.