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Small Business Checklist Item # 3 – Business Structure

Ok, so you have done your research and realize that your business idea is a viable one.  Now you need to look into how you want to structure your business.  There are 4 basic structures to choose from with variations within each structure.  The main thing that you need to think about are covered with the following points.

You need to think of how big you want to become or strive for.  We all know that you wish that your company will be huge, but that will not always happen, so think realistically.  Also, do you wish to retain control of your organization, or do you want to have people running it for you?  Remember, once you start bringing in outsiders to take over the management, you might be seeing yourself slowly being knocked out of the organization depending on where the new management see the company going.  This happens often when you start getting angel inventors involved and being on a board.  Think about how you want the taxes to be handled in your company.  Each business structure is handled different when it comes to taxes as in some are taxed as a separate entity as the owners and others are taxed as an individual.  This is just something to think about.  One key point to think about is if your product or service is vulnerable to lawsuits of any type.  We know that people like to throw out outlandish lawsuits now because it is so easy, but remember you need to protect what you have worked for.  Each business structure is different, but if you have a service or product that could harm or damage then think about a form that will protect your belongings such as your car and house.  The government can take all of these items if you do not setup the company properly and you get into a situation where you cannot pay for the damages of any claim.

So you have thought about these items, now you want to think about which structure will work for you.  Here are the basic structures of business:

Sole Proprietor –  While this is the easiest form to setup and the easies to deal with taxes, you are putting yourself on the line if your business gets in trouble and has no way of paying for it.  This form is the most common in the small business arena, but a lot of business owners are changing their proprietorships over to another form.

Partnership – This form is also easy to setup and it gives you an added benefit of using another source of funds to invest into the business.  Each owners takes their slice of the profits, but remember that with each persons ideas, there can be and most likely will be disagreements.  This form also may have limited life because it will end with the death or withdrawal of a partner.

Corporation – This form is heard about a lot from business owners and other alike.  It is popular because a corporation is held to be a unique entity, which is separate from the ones that own it.  You can still perform business as usual, but the corporation will not dissolve if you or a partner die, it will continue on.  This form can be broken out into c-corp which is essentially double taxed, which can hurt, or an s-corp which is taxed like a partnership.  This form is much harder to setup and you have to do it right.  You are also not considered an owner, but a shareholder.

Limited Liability Company (LLC) – This is a fairly new form that allows the company to be taxed like a proprietor, but it gives you limited liability, so you can be protected from your business actions.  This is becoming very popular in the US and some states still are not sure how to tax or treat LLC’s.  Please contact your Secretary of State and your Department of Revenue for more information on LLC formations.

We didn’t want to get into all the different details of the business structures, but if you want to learn more, you can learn from sba.gov.  This is the Small Business Administration.  They have a lot of good resources to help as well.  Please make sure that you pick a good form of business that will keep your assets safe and will allow you to run successfully into the future.  Remember that you do have the option to change the structure of your business if you choose, but you will have to dissolve the previous form.  Please check with us tomorrow for checklist item # 4!

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