How to Start a Business? Select the Right Structure
How to start a business in terms of selecting the right structure is an early, critical step that you must take and an important one because you will live with that decision for a long time. It is a strong business building block that leads to the ultimate success of your enterprise. Typically, the business structures you will want to pick from include: sole proprietorship, general partnership, limited partnership, C Corporation, S Corporation, professional corporation, nonprofit corporation, limited liability company or LLC, professional limited liability company and limited liability partnership.
How to start a business? Click here for pros and cons
of many types of business structures.
How to Start a Business
Key elements you need to consider when selecting a business structure are as follows:
- Legal restrictions: When you are thinking about how to start a business, one of the easiest business structures with the least legal restrictions is the sole proprietorship. That is not to say that there are no legal restrictions-you must obey the law and pay your taxes. As you go up the latter toward more complex structures, however, there is an increased level of legal restrictions and reporting requirements, depending on the state in which the business structure is created. [You need to click on your state's business web pages at the bottom of this article.]
- Level of liability you wish to assume: The sole proprietorship may be the easiest business structure to set up but it also leaves the sole proprietor with all of the liability of the business-all of the debts, all of the lawsuits, everything. The general partnership structure leaves the owners similarly vulnerable. Once you incorporate the business, the liability passes from you to the corporation. For new companies and smaller firms, many credit card companies and banks will still want the owner of the corporation to personally vouch for the debts that are run up on the credit card or for the bank loan. Larger more successful firms generally are not required to have the owner personally vouch for the firm's debts.
- Type of business operation: Naturally, a lot depends on the type of business you intend to become. If you will be a non-profit association, then you would set up a nonprofit corporation. If you intend to buy a piece of commercial real estate-perhaps a small shopping center-and then sell partnership interests, then a limited partnership might be right for you. If you will enter a business where there could be a lot of liability-let's say you launch a rock blasting company-then you would want to become a corporation of some kind to limit your personal liability, and, of course, have lots of the right insurance. A corporate structure would also be wise for any profession where the owner has exposure to liability. You need to consult a lawyer on these matters. Do not leave them to guesswork. And by the way, if you have limited funds with which to start a business, don't skimp on the lawyer. He or she could save you major heartache down the road.
- Distribution of earnings-When you are thinking about how to start a business, distribution of earnings is a key factor that must be considered and you need to check with your accountant on this one. If you intend to run a small business all by yourself and have the company folded when you die, you don't need to concern yourself with distribution of earnings. If there are numerous partners with varying shares in the operation, a corporation might be required.
- Capital needs-The structure of your business could well depend on if you will fund the business yourself from your own resources or if you will use OPM-other people's money. If you need to attract investors and lenders, you must to set up a corporate structure of some kind. Banks and professional investors are a hard-nosed bunch of business people. They like to see corporate business structures with business plans, marketing plans and financial plans that are realistic and potentially profitable. They like brochures, great looking stationery, beautiful offices and more. They are unhappy with loosely structured sole proprietorships and partnerships.
- Number of employees: The number of employees you intend to hire could well play a part in what business structure you choose. The more employees you have, the more you need to structure your business to protect you and your personal assets from liability. When you have a lot of employees, it is not only someone hurting themselves in the workplace that you need to worry about, which is typically covered by insurance anyway, but also the disgruntled employee who was let go, passed over for advancement, and the list goes on and on and on!
Your best first step is to consult your accountant and your lawyer on business structure. Discuss the pros and cons of each and listen to what they have to say. Either of these professionals can advise you on the best structure for you and help you set up the structure you need. If you plan to incorporate, that is somewhat more complex and time consuming than setting up a sole proprietorship, which you can do yourself, typically through your county clerk. In fact, you can do it yourself if you wish to invest the time and energy it takes to figure out what you are doing.
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