Creating a startup is a thrilling adventure. At the outset of that journey, you must pick a corporate structure. The decision you make has consequences affecting how it functions, so choose wisely. Here’s a speedy rundown of the most common business setups.
Sole Proprietorships
As far as simplicity goes, sole proprietorships are best. When forming one, no official actions are necessary. You are, however, responsible for every aspect of your operation, including paying off debts and assuming liabilities. You’ll also shoulder the burden of pursuing any necessary permits or licenses on your own.
Partnerships
Under this type of business arrangement, two or more persons share ownership of a venture. In addition to dividing operational responsibilities, everyone shares the resulting gains or losses. Those creating a partnership should formalize the relationship with a partnership agreement. The utility of these documents is they set expectations for what’s to come, thus helping prevent future conflicts that may stem from misunderstandings.
Corporations
Corporations are independent entities owned by shareholders. As such, the business itself remains legally culpable for its activities. Investors cannot be held responsible for their actions. This business arrangement is best suited for larger companies, as these structures are more complex than others. Switching from another formation to that of a corporation sometimes makes sense after a venture becomes established.
Limited Liability Companies
Commonly abbreviated as LLCs, limited liability companies are hybrid business arrangements that combine features of both partnerships and corporations. Therefore, forming an LLC is often the best decision for small companies. LLCs streamline paperwork, offer liability protection, and have certain tax advantages. The rules for forming LLCs differ by state, so check the laws in your region.
Cooperatives
Companies founded as cooperatives are owned and operated by the individuals who benefit most from them. An example would be a farm, where the fruits and vegetables they grow are taken home and consumed by the cooperative’s owners.
Cooperatives may also sell their products and services to the public. The profits then get distributed between the user-owners. It’s typical for a board of directors to be in charge of running one of these operations. Meanwhile, all members have voting powers that allow them to control the company’s direction.
Choosing the best corporate structure for your business is a vital matter. Making an informed decision requires understanding the alternatives and recognizing what benefits come with which path. Carefully weigh your choices before forming your business.
