Some people approach the entity formation process with the idea that there is one right business type given their proposed model, but the truth is that there are many different business forms that can work well for companies in different scenarios.
Prospective entrepreneurs thinking about how to protect their interests and minimize the challenges involved in the startup process may wonder what choice would be best for their current plans. The answers to the three questions below can help an aspiring business owner to make an informed decision regarding the type of company structure that they may want to launch.
How big will the business become?
Looking at the one-year, three-year and five-year plans for the business can give entrepreneurs and investors an idea of how quickly growth will become a challenge. The overall scope of operations and the number of other businesses and professionals involved in the company’s development can also influence the amount of structure required. More complicated and faster-growing businesses often require a more formal structure, such as corporation formation or a limited liability company (LLC) for the protection of those helping start and run the organization.
How risky will basic operations be?
There is a degree of risk inherent in any type of business model. Retail shops have to worry about visitors getting hurt in spilled merchandise and the possibility of an armed robbery, while manufacturing facilities must consider the possibility of chemical spills, machinery malfunctions and defective products. Businesses could end up facing lawsuits over defective products or poorly-provided services, and the degree of risk, as well as the estimated number of products delivered or services provided each year, may influence how much protection an owner or investor requires during the formation process.
What kinds of taxes are a concern?
Smaller companies may benefit from a pass-through income tax system. On the other hand, those starting a larger business may have more company taxes to consider and a set salary already in the works, which might mean that a corporation or other more complicated entity will offer better tax incentives for the business itself.
Those who plan carefully when forming a business can reap the benefits of their careful planning regardless of whether the company becomes successful or it ultimately fails. Choosing the right type of business when starting a company can be as important as doing proper market research before pitching to investors.
