It can be difficult and gratifying to launch a business. The required and frequently enjoyable aspects of starting your business include picking your company’s name, designing your website, sourcing your items, and locating your first clients.
However, just having a website and a logo doesn’t qualify you as a legitimate company. In order to assure your ability to succeed as a business owner, it’s crucial that you put up the right business foundation.
Do a website and a logo qualify you as “legitimate”? And more importantly, do they safeguard you in case something goes wrong as a business owner?
The foundation of your firm is business incorporation, despite the fact that it is not the most glamorous task. Your company becomes a recognized legal entity by the government when you incorporate it. Let’s explore the most popular company entities that you can consider registering as.
Table of Contents
- Why your business structure matters
- Types of business structures
- How to choose your business structure
- Incorporating your business
1. Why your business structure matters
Your business structure affects a variety of things, including how you’ll be taxed, what your liabilities are, and how you’ll raise money and capital. Your organisational structure will be different if you join a business partnership than if you just form an LLC.
There are several advantages to incorporating your firm, some of the most significant of which are as follows:
- Protection of personal assets;
- Transferable ownership;
- Potential for lower taxes;
- Easier to secure business funding;
- Separate credit rating regardless of an owner’s personal score;
- Helping ensure you have limited liability, if there are ever any legal issues related to your business;
- Simpler to create retirement plans.
Every business structure offers different benefits for personal liability, ownership, taxation, and funding, among other aspects.
2. Types of business structures
Even while every business model has advantages, some models work better with particular corporate structures. As your company develops over time, you can also alter your organisational structure, however doing so involves additional administrative procedures.
1. Sole proprietorship
A sole proprietorship is an unincorporated business where there is no legal separation between the business and the person running it. Possibly the simplest business structure, it is also the easiest to set up and run.
Some new e-commerce companies use sole proprietorships because they have low startup costs and little risk of legal liability. A sole proprietorship is the quickest and simplest way to get started, but it can later change into another business type—in fact, it has to if you expand your team.
A non-employer business can be a sole proprietorship. One of the most prevalent company models in the US, these companies operate without paying staff. A non-employer business makes up about 40% of small business owners’ primary source of income, while 60% utilize it as a supplement.
Advantages of sole proprietorship:
- Lower taxes.Unlike an LLC, which requires you to file state and federal taxes separately, a sole proprietorship just requires one tax filing. Although the owner files taxes, the firm does not.
- Complete control of your business.You get to decide how to run your business as you don’t have to take into account any partners or investors—just it’s you.
- Easy to change your structure in the future. You are not required to continue operating as a sole proprietorship if that is how you started. Whenever you’re ready, you can switch to a new kind of business in the future.
- Unlimited Personal liability.Taxes for a sole proprietorship must be submitted under the name of the business’s owner. This increases risk since there is no separation between the person and the business; instead, the person is responsible for all actions taken by the corporation. As a result, the person’s private property is at risk. Many aspiring business owners are uneasy with the idea of being subject to personal liability.
Single firms with two or more owners are called partnerships. Each of these business owners or partners provides something to the company, whether it is money, assets, labour, skills, or something similar. The company’s profits are likewise divided among them.
There are two types of partnerships:
- General partnership (GP). A general partnership presupposes that the enterprise is either equally divided or divided into proportions that have been previously agreed upon and documented.
- Limited partnership (LP).For certain participants, a limited partnership can restrict both control and liability. Partners in limited liability partnerships are partially personally accountable, but only for one partner’s negligence.
Pass-through taxes are used in partnership taxation. This indicates that the owners pay taxes rather than the company. Instead of the business’s revenue, taxes are calculated based on each partner’s income from the business.
Advantages of partnerships:
- Share the responsibility. There is a proverb that says there is “strength in numbers”; this proverb might be applied to a partnership. You can share the load with your partner rather than carrying it all alone. In many situations, this also gives you more access to capital.
- Simple to start and manage.A formal partnership can be formed rather easily. You also have fewer tax forms than other business formats, which simplifies continuing management.
Disadvantages of partnerships:
- Partner conflicts. In the majority of partnerships, not every choice is unanimously accepted by all parties. Compromise is common, but over time it can lead to tension between business owners and internally. When you sign into this arrangement, it’s crucial to make sure you and your partner are on the same page.
- Personal liability.Owners take on more personal risk because partnerships’ taxes don’t clearly distinguish between the firm and the individual. Additionally, owners pay personal taxes rather than the firm, which increases the amount owed.
Owners of corporations are immune from personal accountability because they are separate legal entities from people, excepting unusual and exceptional circumstances. Instead of shifting the risk to the individuals who own and manage the company, a corporation takes on all of it.
Compared to other business arrangements, corporations are also easier to transfer to new owners. You register your corporation with your state, much as other forms of businesses. Although every jurisdiction has different requirements for corporations, almost all are obliged to pay municipal, state, and federal taxes, which are all reported separately from shareholders’ taxes.
It’s possible that corporations pay less tax than people do. It’s a good idea to compare individual tax rates—for sole proprietorships, LLCs, and partnerships—with corporation tax rates because these vary by state. The corporation will often pay less, but to be certain, speak with a tax expert.
Small business shareholders may experience double taxation in specific circumstances. To be more precise, the firm will pay taxes on its profits, and then the shareholders will pay taxes on their individual part of the profits.
Advantages of a corporation:
- Reduced risk.The primary benefit of establishing a corporation is the protection of a shareholder’s personal property from being subject to the firm’s assets or liabilities. For instance, if a customer successfully sues a retail business, the business would be obligated to pay. If the corporation did not have the money to make up the gap, shareholders would not be accountable for doing so.
- Raise capital through shares.Shares can be sold by corporations to raise money. Because they represent stability and regular pay, businesses are more appealing to some workers because they can always sell shares if they run out of money.
Disadvantages of a corporation:
- More work to incorporate and maintain.In general, corporations are more challenging to establish and run than other commercial formations. There is additional setup required, and you must carefully maintain the company’s status as a distinct legal entity at all times.
- Personal liability isn’t completely eliminated.You might be held personally more responsible than you thought if the corporation’s records are handled inappropriately. Attorneys have “pierced the corporate veil” when they sue corporations and demonstrate that the corporate records were not kept up to date and the corporation was not acting as a separate legal entity. In other words, your personal assets are no longer protected.
A hybrid business structure known as a limited liability company (LLC) combines the simplicity of a partnership with the liability protection offered by corporations. It is a specific kind of corporation. Limited liability companies are also included in the LLC category.
Owners, also known as members, are responsible for paying taxes on LLC profits; the limited liability structure itself is not taxed separately. LLCs with at least two members have the choice of being taxed as corporations or partnerships, if they so choose. The distinction between personal and business taxes is abolished by this taxation choice.
A more recent corporate structure, LLCs are gaining popularity. While other company structures have dropped during the 1980s, LLCs have seen an increase, according to data from the IRS.
LLCs might only last a certain amount of time, depending on the state. When a member resigns, the LLC may be dissolved in some jurisdictions. Ultimately, a single founder who is just starting out will find that limited liability firms are a terrific business structure
Advantages of an LLC:
- Simple management.Compared to corporations, LLCs have significantly lower record-keeping requirements and profit-sharing restrictions. It’s a fairly easy-to-understand business structure that suits small, medium, and startup companies.
- Personal protection. With an LLC, your personal assets have a level of protection that reduces your liability.
Disadvantages of an LLC:
- Not available for all businesses.There are restrictions on what types of firms and industries can qualify for LLC status in each state. Businesses like banks and insurance companies are frequently forbidden. Foreign LLCs are subject to additional regulations.
- State and federal taxes.Depending on the number of members, local laws, or even the LLC’s articles of organisation, LLC members may need to submit additional forms for both federal and state taxes. An LLC’s members frequently also pay payroll tax.
3. How to choose your business structure
When choosing a structure, there isn’t a simple solution or formula that every new organisation should use. Although many online shops begin as sole proprietorships or partnerships and defer incorporation, the possibility of unrestricted personal liability might be unsettling.
The best approach to determine which business structure is ideal for you and your firm is to consult with an attorney. In the end, the business entity you choose to establish is dependent on a range of significant and individualised considerations. One benefit of incorporating a business is that it establishes a separate entity from you as an individual.
As a result, in many instances, this also lowers your own risk. Stronger owner protections are provided by some business arrangements, such as corporations. Others, like a partnership, provide less in the way of personal security. You must determine the level of personal risk you are willing to accept.
Here are some things to think about with regard to starting your business organisation.
One benefit of incorporating a business is that it establishes a separate entity from you as an individual. As a result, in many instances, this also lowers your own risk. Stronger owner protections are provided by some business arrangements, such as corporations. Others, like a partnership, provide less in the way of personal security. You must determine the level of personal risk you are willing to accept.
This affects the business structure you pick if you’re hiring employees or plan to. For instance, sole entrepreneurs are prohibited from hiring staff. You can therefore begin as a S prop, but if you intend to hire any workers, you will need to file to change your business structure. Your company’s legal setup has a big impact on how you hire employees today and in the future.
Bringing on partners
A business structure that enables having a partner in your venture is another something you should consider. Therefore, you should consider setting up an LLC with additional members, a partnership, or a corporation as an alternative to a sole proprietorship. This category also includes general partnerships.
Your company may reach a stage when you require cash for initiatives like product development, store enlargement, inventory investments, or other critical costs. You can raise money for your e-commerce business in a variety of methods. But a number of variables, like your company’s history and organisational structure, affect your chances of success.
When you incorporate, you can help your business establish credit and a financial history. This data will be examined by prospective lenders, investors, and other capital sources to evaluate whether your company is eligible for funding. Your prospects of obtaining financing and affordable interest rates will be improved by a solid background and credit rating.
4. Incorporating your business
A few administrative procedures must be completed before your business may really be incorporated. You have three options: handle everything yourself, get advice from a professional, or outsource everything. To locate competent professionals and sales tax specialists who can assist, search through Shopify Experts if you wish to engage an expert.
At a glance, you’ll need to take the following steps to officially incorporate your business:
Decide where you’ll incorporate your business
Where you incorporate will be an easy decision for some business owners. You’ll probably choose your home state if you operate and sell locally. There is more to this choice than you might imagine if you intend to sell throughout the nation or perhaps abroad. Regardless of the legal structure of your company, you must still file your personal tax returns.
Each state has its own regulations for various business structures, along with application, taxing, and administrative guidelines specific to that jurisdiction. Here you may apply for your state licence and review the criteria for your state.
Choose your business name
You’ll probably be known to the public by your business name, or a variation of it (try our business name generator). For instance, even though General Electric’s official company name is General Electric, it is sometimes referred to as “GE.”
This guide to choose a business name might help you come up with suggestions if you’re having trouble coming up with a name. When you do have an idea you like, check the database of your state to make sure no one else has already claimed it.
Apply for your federal employer identification number (EIN)
Similar to how your Social Security number works, your federal employer identification number, or EIN as it’s usually known, is used when you file paperwork and taxes with the government. The government recognizes your company in this way. To incorporate your firm, you need your EIN.
To register for an EIN, fill out this form on the IRS website. You’ll get your EIN immediately.
File your paperwork and/or articles of incorporation
You can officially start your business by filing the necessary papers with your state once you have your EIN and a name in mind. The articles of formation for your corporation must be submitted with this application. All of this administrative documentation essentially provides details about your business, its founders, partners, members, and shareholders. These documents formally establish your company. Keep in mind that you must still submit personal tax returns in accordance with the regulations of your state and nation.