Brainstorming a new business concept and then putting that good or service into the market is a dream for many. Roughly 400 million entrepreneurs are running a business somewhere in the world, and that number continues to grow. The expanding enterprise landscape makes it difficult to stand out, however, and increasingly easy to blend in with the crowd.
Positioning a new business for optimal success depends, in part, on having a good initial idea, as well as a way to cost-effectively manufacture the product or scale the service. Another key component, one that often gets overlooked early on, is deciding what kind of business structure to adopt when officially filing to form the company.
Entrepreneurs need to evaluate the long-term goals for their businesses and weigh those objectives against the advantages and disadvantages that each potential structure offers. One individual may find that an LLC is the best route, for instance, while another may opt for a non-profit designation. The important thing is to determine which structure will best allow the business to grow and become sustainable.
Multiple options are available to aspiring startup owners. The following list highlights a few.
As the name suggests, a sole proprietorship is a business owned and operated by a single person. These kinds of entities are not incorporated, they require no extra cost, and from a tax perspective, the business owner and his or her company reside on the same level. In other words, the good or service offered is not considered a separate entity, and therefore the entrepreneur holds complete liability.
General partnerships (GPs) resemble sole proprietorships in the sense that the liability falls on the owner(s). The difference is that there are multiple owners in the case of a general partnership. Two or more individuals who jointly start a company benefit from fewer extra costs and paperwork. However, this structure does limit the ability to bring in investors. One might classify GPs, and partnerships in general, as informal structures relative to other forms.
In contrast with GPs, limited partnerships feature a dual dynamic in which partners are either general or limited. The limited partners act as investors for the business, and because of that role, they have no control over company decisions and direction. General partners, on the other hand, function as the business leaders and assume the liability for the entity. This structure incurs more costs, but it also allows for investor support.
S and C Corporations
The corporation title is an umbrella term that covers two distinct structures, S and C (listed below). In general, however, corporations appear on the opposite side of the complexity spectrum from proprietorships and partnerships. These entities feature investors, as well as a board of directors and shareholders. Further, corporate formation is more difficult than the other structures an entrepreneur might choose.
First-time entrepreneurs and owners of small businesses who select the corporation form often go with the S variation. Under this structure, shareholders (as many as 100) assume the majority of debt and liability responsibilities, with a small amount going to the owner of the company. Filing for an S-Corporation results in a similar tax arrangement as a partnership or LLC, and it is easier to convert to a C-Corporation from S, rather than vice versa.
When a startup owner files a business as a corporation, the default designation is a C-Corporation. Owners are considered legally separate from their companies, and they have the opportunity to sell stock and to allow employees to buy stock. Unlike other business structures, which are less profitable for investors, C-Corporations are often attractive to investors because of the availability of stock options. This option requires more paperwork, but the limited liability serves as the main appeal.
Limited Liability Company
The limited liability company (LLC) structure is the one entrepreneurs with new businesses and smaller teams adopt the most because it holds middle ground between the benefits of partnerships and corporations – the low taxation of the former and the limited liability of the latter. LLCs can have an unlimited number of owners, unlike S-Corporations, and the formation process is simple.
Doing business as (DBA)
Entrepreneurs may find it necessary to file for a doing business as (DBA) registration depending on what kind of company structure they already have. For owners of a sole proprietorship or a GP, the value of a DBA is found in setting up a company under a pseudonym or just a new name. Corporations and LLCs will file for a DBA if they intend to expand their operations by establishing a parent company and subsidiaries that operate under a different title.
Aside from the various unincorporated and incorporated options, some entrepreneurs will decide that a nonprofit structure best fits the needs of their idea. Filing a 501c3 tends to be a complex process, but in the long run, the tax format (no income taxes) of these organizations can facilitate growth and influence in ways that the other for-profit models cannot.