Once you have decided to set up a business, one of the primary decisions that you will be making is that of the business structure.
This is because the structure of your business will have a great impact on the tax that you will be paying, the goals that you set for your business, and how much you earn from your business. Because of the significance of this decision, it is important to consider all aspects of the matter carefully. In this article, we will discuss all the four business structures available to choose from and the pros and cons of each.
1. Sole Proprietorship
This is the simplest form of doing business and does not require any huge initial costs. You can operate this business on your own and are considered to be solely responsible for it. Hiring other people can be done, but you will be expected to follow the rules and regulations associated with the act of employing someone as a sole proprietor. The pros and cons associated with such a structure are:
The first benefit of such a structure lies in the ease of operating the business. You will not have to convince a team of board members before taking an important decision and can thus make quick changes that you feel are important for the growth of the business. Moreover, there are no costs related to setting up the business. You can just go ahead and get your business cards made and can start operating.
One of the major disadvantages of a sole proprietorship is the increased liability burden that comes along. You will be held accountable for any debt that the business has. In case the business is unable to pay it off, your assets will be exposed. Moreover, in a sole proprietorship, the life of the business depends on the life of the owner.
Sole proprietorships slowly grow into partnership as the business expands. In a partnership, two or more people come together to form the business. All the individuals regarded as partners are accountable and share equal responsibility for the business. This means the profits, as well as the liabilities, are equally shared. A partnership agreement determines all the details regarding different scenarios.
A partnership is also regarded as being comparatively simpler and cheaper than other more complex structures. However, it is different from a sole proprietorship in the sense that through such a structure you have the opportunity to raise higher capital. Moreover, if you have a partner with whom you share great understanding, you will eliminate any chances of conflict.
In an unlimited partnership, you will be held responsible for all the debts taken by the business regardless of which partner they are associated with. Hence, it is essential to choose the right partner. Because of the liability falling upon the management, your assets are again exposed in such a structure too. The tax payments are also expected to increase for every partner, and if you wish to wind up the business, the process can be a difficult one.
3. Limited Liability Company (LLC)
The first step to forming an LLC is to get it registered via company formation agent site such as https://www.1stformations.co.uk/. This brings about credibility to the business and is thus seen as a huge advantage over the other two structures discussed above. Another way in which an LLC is considered to be different from an unlimited partnership is regarding risk. The owners in an LLC are considered to be responsible for the debts of the business only to the extent to which they have invested their capital.
In such a structure the exposure to risk is controllable, and thus your assets do not have to incur losses in case of a damaging situation. The tax liability also becomes more favorable in such a structure as the owners are taxed as being the employees of the business. Because of the ability to protect your assets in such a structure, you can bring stability to your lifestyle.
The regulatory demands in such a structure are more complex and serious. Hence, the adherence policy to such regulations requires a lot of time and research. The financial reports are also expected to be shared publicly which brings about more accountability.
4. Limited Liability Partnership (LLP)
Such a structure is seen to be a combination of a traditional partnership and an LLC. The members of such a partnership are required to register themselves as being self-employed but are liable for the debt of the business only to the extent of their capital investment.
Because liability depends on the capital investment, a certain amount of flexibility is added to the complete structure, and the partners are protected from any damage to their assets. There is an opportunity to raise increased capital through multiple members.
In this case, however, the profit earned through the business is taxed as personal income and the partners are expected to disclose their income. There is a deadline that must be followed regarding starting trade after you register a company name.
Depending on the kind of growth your business is expected to witness and the liabilities associated with it, the business structure should be decided after careful consideration.