How to Choose the Best Structure for Your Business

Most individuals with entrepreneurial dreams have a big idea that can be developed into a thriving entity. However, they rarely pay attention to the type of business structure they wish to establish. These passionate individuals do not get into the nitty-gritty of setting up a venture and focus on the goals and vision. In their haste to start the operations, they often choose any structure without consideration.

However, this is the wrong approach, and the mistake is realised in the long run when the business starts expanding.

Entrepreneurs must know the details of different business structures to determine the most suitable type for their organisations. This ensures that the entity is in the right zone from the beginning and that scaling up will not be challenging while complying with the regulations.

So, here is how to choose the best structure for your business. It helps to mould and improve the venture effectively over the years without hassles.

1. Importance of the Business Structure

The first step in setting up a business is choosing the right business structure. This is a significant decision because it is a mandatory requirement that helps determine the licences and permits needed by the organisation. It also decides the taxes to be paid by the business and the trademark registrations. The legal obligations to be met by the business also depend on its structure.

It is even helpful when the entrepreneur decides to sell business online, as it fetches the best price. Besides determining the legal and financial implications of the entity, the right structure is helpful in establishing credibility and leveraging the growth potential.

2. Types of Business Structure

Entrepreneurs must understand that there are four types of business structures to choose the right one. These include:

Sole Trader

A sole trader is a business that is run by an individual who is legally responsible for everything related to the entity, including the operations, debts, profits and losses.

Company

This business structure creates a separate legal entity from the owner. The company has rights similar to a normal person and can be sued or incur losses. It can also sue other individuals or businesses. Most budding entrepreneurs look for a company, which makes it easy for owners to sell business online.

Partnership

A partnership is a business structure formed by two or more individuals who share the income and losses incurred by the entity. A partnership can be of three types:

General Partnership

In a general partnership, all the partners are equally responsible for operations and management. They have unlimited liability for debts and obligations.

Limited Partnership

A limited partnership is one in which the partners have a limited liability based on their investment in the business. Limited partners are not directly involved in the daily operations and remain passive investors.

Incorporated Limited Partnership

In this structure, the partners have limited liability for the business’s debts. The organisation should also have one general partner with unlimited liability, who is legally responsible for shortfalls in meeting obligations.

Trust

The trust has a trustee who is responsible for managing the business on behalf of the beneficiaries (trust members). The trustee is responsible for the income and losses incurred by the business. Entrepreneurs who sell business online must make it clear that the structure is a trust to get qualified leads and understand the legal and tax considerations.

3. Differences Between Business Structures

All business structures have different characteristics that impact the obligations of entrepreneurs. These include:

Cost of Setting Up

The cost of setting up a sole trader structure is the lowest, while it is the highest for a trust. A partnership incurs medium-range expenses, while a company involves medium-to-high costs.

Ease of Establishment

A sole trader business is the easiest to set up, whereas a trust has the most complex establishment. A partnership is fairly challenging, while a company is difficult to set up.

Legal Responsibilities

A company has the maximum legal obligations, followed by a trust, which has a fair share of requirements to meet. A partnership may have low to medium commitments, while a sole trader has minimal responsibilities.

Tax Implications

Trusts have maximum tax obligations while sole traders and partnerships have the fewest commitments. Companies have to comply with a fair number of tax responsibilities.

4. Choosing the Best Business Structure

Equipped with the information provided above, entrepreneurs can make the right choice when picking a business structure. To stay protected, they must opt for a type that is easy and affordable to set up and has moderate legal and tax responsibilities. It is vital to assess the risks associated with each type and its suitability for your idea and available resources.

It must be understood that the business structure can be changed at any time. Most entrepreneurs switch to a different structure when they scale up or there is a change in the management when they sell business online. For example, a sole trader will have to become a company or partnership if they wish to expand.

Wrapping Up

Choosing the right business structure is the first thing to do when entrepreneurs start writing the business plan. It helps them to understand the ownership and compliance requirements. They must pick the structure that meets their needs effectively.