When creating a start-up business, there seems to be a million different things that have to be taken into consideration. Finding money, perfecting a service, product or line, making important connections, and other tasks create a bewildering array of decisions that need to be made. One such decision that shouldn’t be overlooked is the type of organizational structure you’ll be using.
There are multiple kinds, but all of them are chosen on the basis of taxes, management direction, and matters of legal liability.
A sole proprietorship is the most basic organizational structure, and the most common one among start-up businesses. In the sole proprietorship structure, the founder of the company takes in all the profits and has all the decision-making power. Needless to say, organizing such a company is also an easy task.
Unfortunately, this is where the benefits end. Any profits you make are taxed as personal income, your company will pay higher taxes, and you take on all legal responsibilities for your businesses’ actions, meaning that personal assets are vulnerable to fines and taxes. Still, going it alone can be a good plan for some start-ups.
When two, three or even more people come together to start a business, it is called a partnership. There is more legal paperwork that needs to be taken care of in this type of arrangement than there would be with a sole proprietorship. Each partner needs to be aware of his or her own level of liability, as well as the repercussions of walking away from the partnership.
Sit down together and work all of these details out so that they don’t become sticky issues later. Make sure that there is an equal balance of power and that everyone is comfortable within their own role. Most importantly, get it all on paper so there is always a document to refer back to if there should ever be a disagreement.
A limited partnership works much as a partnership, though there are a few key differences.
The first is that partners, as either investors or advisors, serve under the same rules as a partnership, but not all partners are equally liable in a legal sense, though at least one partner must agree to take the unlimited legal liability attached to a sole proprietorship.
The second is that partnership agreements include clauses that provide for a return on any investments made into the start-up, which can be a good way for start-up businesses to get the beginning funds they need. This rate of return is chosen at the time the agreement is made.
Finally, there’s the option of incorporating your start up, effectively turning your company into a legal entity separate from owners and employees, at least in terms of legal liabilities. This protects your assets and, even better, can be done on your own.
However, there are multiple kinds of incorporation that a company can become, and each one is held to different rules and standards by the government. Some possible drawbacks include increased cost, tighter regulations, company size requirements, and limited financing options in the future, depending on what type of incorporation you choose.
Even though it’s not the fun part of starting your own business, it is important that you get these steps completed as soon as possible. When developing legal documents, you will want to remember to be as detailed as possible in order to protect your own interests if there should ever be a conflict between yourself and other involved parties. Staying grounded and making wise decisions will allow you to focus more on the business once things really get going.