To start a business? Here’s something to think about

There are five different business structures available in the United States, including sole proprietorship, partnership, limited liability company (LLC), S corporation, and C corporation. The three most popular structures are Sole proprietorship, LLC, and C Corporation.

Obviously, the simplest business structure is a sole proprietorship. Most people who start their own business without doing anything to form a separate entity are called sole proprietors. This is by far the simplest form of trading. Basically, you and your business are one in the same. In some cases, a sole proprietorship is the best option, but this is not always the case.

Operating as a sole proprietorship is without a doubt the easiest and cheapest way to do business. You basically open the doors and walk out. The temptation to operate in this way is great and many succumb. The shortcomings of this form of business are also great. There is absolutely no protection between you and your business and there are no tax benefits. There are no particular record keeping requirements, which is easy enough but often leads to sloppy business practices. Careless businesses create poor decision making and set up failure. At the very least, you become easy prey for IRS auditing and lawsuits. Planning, early on, can save you money on an ongoing basis and protect the assets you’ve worked so hard to accumulate.

The decision you make in choosing one business structure over another will have an effect on the future of your business. The decision you make will affect your ability to attract investors, transfer your business to someone else, sell it, or bring new people into the business (people of different qualities, such as managers, partners, angel investors, and shareholders).

The structure you choose also affects the exit strategy of your business. The structure you choose today will affect what happens to your business if something tragic happens to you, or if you decide to retire or sell your business to a competitor.

Ideally, you should think about the structure before starting a business. However, if you already have a business (or if your hobby is turning into a business), then you need to decide on the business structure as soon as possible. If you’ve decided today is the day you’ll choose a business structure, make sure today is actually the day you do. Don’t put this decision aside until you’re “big enough.”

Do not think that it will be easy for you to change the structure of your company every time you feel like it. While you can always register a new company and transfer assets to that new entity, you can’t erase the past; Sometimes the past comes back to haunt you.

What if you start a business as a sole proprietor and do something wrong with no immediate consequences? Later on, it may finally be “big enough” and incorporate. Everything is going well, until the day you get sued for something you did years ago. Now, as a large company, it presents a lucrative goal for others to sue. Because you could be sued for something that happened when you were a sole proprietor, your new business structure may not be able to protect you from liability.

You may have an investor dispute that originates in the days before you incorporated, because some decisions you made at that time may influence the future of your company. Your future partners or investors (who you never thought you would have growing up) could personally blame you for it.

Someone you hired in the past to do a small job may have done something wrong, and now you are personally responsible for it, even many years later.

That is why LegalCreation recommends forming an LLC or Incorporation depending on your business and priorities.