Selecting a Business Structure
Once you have made the decision to start a business you will need to decide how you want to structure it. A business can be run as a sole proprietorship, a partnership or a corporation, there are advantages and disadvantages to all three. Most people will find that they change structure as the go along for example starting as a sole proprietor and then later incorporating. The right business structure will depend largely on the size of your business and how much control you want over running it.
The most basic business structure and the one that most small businesses start with is the sole proprietorship, this means that there is essentially no legal distinction between you and your business.
The reason to structure your business this way is that it is simple and cheap, usually it just involves registering your businesses name. It also offers the advantage requiring the least start up capital
of any business type and it has the least amount of regulatory burden. All profits are kept by you as the owner, and if you're business is struggling the losses can be deducted from your personal income taxes.
The disadvantages to this type of business structure is that you are responsible for all of your companies debts and liabilities. It is also usually more difficult to arrange financing for this type of business.
A partnership is similar to a sole proprietorship, except that the business will have more than one owner. The advantages and disadvantages are similar to a sole proprietorship except that you also have the advantage of having somebody to split the start up costs with and the disadvantage of being responsible for the business decisions of your partner, any debts he runs up on behalf of the business are also your debts. If you plan to establish a partnership it is important to have a lawyer draw up a partnership agreement in order to protect your interests. This should cover things like how the profits will be shared and what happens when the partnership is dissolved.
The third option for structuring your business is to form a corporation, the advantage here is that the company becomes a separate legal entity. That means that you are not personally responsible for the companies debts or liabilities, which keeps your personal finance away from your business finance - something that is very important in risky business sectors. It also means that ownership can be transferred and the company will continue to exist long after you have ceased to be involved with it. It is usually easier to raise capital with a corporation than with a different business structure. There may also be tax advantages to incorporating, but this will depend on your companies situation. The disadvantages to forming a corporation are that it can be expensive and complicated and there are far more government regulations involved in running a corporation than there are with the other types of business.