As most entrepreneurs will agree, starting a business can be a very exciting and challenging time. After you’ve covered the fundamentals like your business idea and financing, one of the key first steps is to choose a business structure for your start-up. If you haven’t given it any thought yet, now is the time to get planning! Think of your business structure as the walls of a house: they give a home shape and support and they hold everything together. And that’s exactly what your business structure is going to do for your enterprise.
Since there are a couple of different types of business structures to choose from, it can be confusing for a newbie to make a decisive decision. However, that’s exactly what this article will help you do.
What It Means: You’re going to be the only owner/ responsible party operating the business. It’s the most basic business plan to work with and a great idea if you’re looking to run a one-person show. Any money you’ll be spending on the business and making from it will be calculated as a part of your personal income tax.
Pros: The most pressing advantage is that this is an affordable option and it’s cost-effective if you’re the sole investor and you don’t want to start out too big. It’s also a safer option if you first want to test the waters and gauge the initial response to your business idea before going at it full-throttle.
Cons: Since you’re the only person responsible you’re also going to be the only person liable. If your business fails to take off or you find yourself dealing with bankruptcy or in a legal quagmire of some sort you might find yourself fighting a very hard uphill battle all by yourself. The biggest risk stems from the fact that the investments, and thus the vulnerabilities, come from your personal assets. You will, quite literally, be putting everything on the line with this one.
You should go down this route if the anticipated losses are something you can absorb, or you have an insurance cover to protect you in case things go south. This is also recommended for when you have a very small number of people working for/ with you or you’re going it alone. In a nutshell, if you stand to gain more than you stand to lose, go ahead!
What It Means: We’re moving a step ahead from sole proprietorship here: this means you’re working jointly with someone else. There could be two or more of you in the partnership and you would essentially be running the business together. All the partners will be individually responsible for the business, any legalities and finances.
Pros: You don’t have to bear the burden alone! You’ve got someone to share your troubles with, whether it’s the initial investment or the day-to-day responsibility of running the business. If your partnership evolves over time you can always have your business structure amended.
Cons: There’s no cap on how responsible each partner is. And then there’s the issue of personal equations changing over time: partners often start out as friends but this can change drastically. Interpersonal issues can often hinder the business. Sharing everything might not be the best idea.
This is a good idea for industries like real estate where you need more than one investor and operator.
Recommended Reading: Is Trademark Registration Important For Your Business?
Private Limited Company
What It Means: This sort of business structure distinguishes the business from the owner(s). It basically means that your personal assets are not vulnerable should anything happen to the business.
Pros: You don’t have to worry about your personal assets being compromised should your business run into fiscal/ legal troubles. Your liability only extends to the business investments you’ve made.
Cons: It’s a more complicated structure, and it’s not affordable. You’ll have to invest significant time, energy and resources into taxation and accounting paperwork. There’s a lot more due diligence required from you.
Opt for this if you’re certain you will be expanding your business and you want to separate the personal from the professional.
Limited Liability Partnership
What It Means: In a partnership the degree of liability of the partners is pre-determined. This can apply to all the partners, or just some of them.
Pros: You’re protected your the business decisions of your partner(s), especially those that do not involve you or your consent. You’re not liable for other people’s mistakes.
Cons: This business structure negates the possibility of public investments and funding. The liability can extend to personal assets. And even if you’re not personally vulnerable the actions of a partner can make the business vulnerable.
Choose this business structure if you’re not certain about where your business is headed and whether or not you will be trying for expansion in the early stages.