Advantages And Drawbacks Of Company Structure Types

Posted by on Jul 31, 2013 in Tax Planning | 0 comments

Starting a small company is a fascinating and fulfilling exercise – and choosing a company structure may feel like a dull decision in light of the culmination of your lifelong dream.  One of the biggest challenges at the early stages is the determination of  how you will go forward from here. For example, you probably developed a simple business plan and possibly a marketing plan.  But the first and most essential thing to look at initially is your choice of the legal framework for your company.

This framework, or company structure, depends on things like your business partners (or lack thereof), tax concerns, personal financial situation, and long term financial (and other) objectives.

You may even be familiar with some or all of these, but read through it briefly to determine whether any stand out.  If they do, your next step is to talk to us! The last thing we want is for you to choose quickly and based on a few notes, and then realize later you could (or should) have done it differently.

Here are the types:

Sole Proprietorship

This is probably what you are most familiar with.  It means your business is managed completely by one individual (although associates may be engaged in the business). The CEO or owner must run the company using his or her lawful name, rather than a fake name or a d/b/a (doing business as).

Pros:  This is very simple to begin.  There are no filings needed as such, and no company filings later  (though some declarations may require the processing of an unincorporated business return). Tax calculations are simplified – profits and losses are revealed on individual tax profits.

Cons: You as the owner are held liable against individual legal responsibility. If the company is prosecuted, your personal belongings may be at risk.

Partnership

This means your business is created by two or more individuals who accept to split the profits and losses of a small company.  It’s another common business type, but there are many pitfalls to be avoided, and we’d strongly recommend looking before you leap.  Think of it on the level of choosing a marriage partner (and without feeling the need to be flippant, we’ve heard it said you should consider it even more carefully than that, if that’s possible).

Pros:  No official company process (other than applying for the company name), but a contract between partners is strongly suggested. Tax calculations can be fairly simple, depending on the agreement and number of partners.

Cons:  Partners do not have security against individual liability – each partner is individually responsible for the carelessness and wrongdoings of the other partners’ actions, financial obligations and responsibilities.

Corporation

This starts getting into more paperwork.  It’s a lawful enterprise established by the filing of Articles of Incorporation, which is a fancy way of saying that there are more legal ramifications here!

Pros: The company is handled as an individual “person” and usually protects the entrepreneurs (known as shareholders) from individual responsibility. This type of business often gives a better image to a small company, and it’s the type of business which may help to entice investors.

Cons:  Strict corporate documentation is required – if this is not completed, penalties and problems may arise. There will be additional expenses (such as incorporation processing fees, corporate tax return preparation, and more).

Limited Liability Company (LLC)

If you have multiple partners, but do not want to be held responsible for all their actions, an LLC may be the way.  It’s a combination of a company and a partnership.

Pros: This gives the entrepreneurs more security against individual responsibility (as in a corporation) in addition to preferential tax treatment (as in a partnership). Failing to maintain the proper documentation will not eliminate your liability, but you have some more protection.

Cons:  There are, again, additional expenses required. In addition, the LLC is relatively new in terms of business types, and when it comes to legal issues there is not as much case law in existence.

The key to remember is that every business is different.  You’ll want to learn more than what is in this blog post about the various business types, and talk to us (as well as a lawyer – which we can suggest if you have need) before you make your  final choice.

We look forward to helping you in your new business!

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