There are five distinct business structures available in the United States, including Sole Proprietorship, Partnership, Limited Liability Company (LLC), S Corporation and C Corporation. The three most popular structures are Sole Proprietorship, LLC, and C Corporation.
Obviously, the simplest business structure is a Sole Proprietorship. Most people who start their own business without doing anything to form a separate entity are called sole proprietors. This is, by far, the simplest business form. Basically, you and your business are one in the same. In some cases, a Sole Proprietorship is the best option, but it is not always so.
Operating as a sole proprietor is certainly the easiest and cheapest form of doing business. You basically open the doors and go. The temptation to operate this way is great and many succumb. The shortcomings of this form of business are great also. There is absolutely no protection between you and your business and there are no tax benefits. There are no particular record keeping requirements which is quite easy but often leads to sloppy business practice. Sloppy business creates poor decision making and sets up failure. At the very least you become a sitting duck for IRS audit and lawsuits. Planning, at the beginning, can save you money on an ongoing basis and protect the assets that you have worked so hard to accumulate.
The decision you make when choosing one business structure instead of another will have an effect on the future of your business. The decision you make will affect your ability to attract investors, transfer your business to someone else, sell it or bring new people into the business (people of different qualities, such as managers vs. partners vs. angel investors vs. stock holders).
The structure you choose also affects the exit strategy of your business. The structure you choose today affects what will happen to your business if something tragic should happen to you, or if you decide to retire or sell your business to a competitor.
Ideally, you need to think about the structure before you start a business. If you are already running a business, though (or if your hobby is turning into a business), then you need to decide on the business structure as soon as possible. If you decided that today is the day you will pick a business structure, then make sure that today really is the day you do it. Do not put this decision away until you get “big enough.”
Do not think that it will be easy for you to change your business structure whenever you feel like it. Although you can always register a new company and transfer assets to that new entity, you cannot erase the past; sometimes the past comes back to haunt you.
What if you start a business as a sole proprietor and do something wrong without any immediate consequences. Later on, you might finally get “big enough” and incorporate. All is well, until the day when you get sued for something you did years ago. Now as a big company, you present a lucrative target for others to sue you. Because they might sue you for something that occurred when you were operating as a sole proprietor, your new business structure might not be able to shield you from the liability.
You might have an investor dispute that originates in the days before you were incorporated, because some decisions you made back then can influence the future of your venture. Your future partners or investors (that you never thought you would have back when you were small) might blame you personally for it.
A person you hired in the past to do a small job may have done something wrong, and now you are personally responsible for it, even many years later.
That is why LegalCreation recommends forming and LLC or Incorporation depending on your business and priorities.
By: Stefano Grossi
