Business owners have to dedicate time to plan many aspects of a new enterprise. Some of the main factors to consider include:
- Choosing a business name
- Drafting a business operations plan
- Picking a location
- Determining the services and goods to be sold
- Planning the source of capital, and
- Deciding business structure
Deciding the business structure is critical, as each model is taxed differently. Moreover, the model you choose will determine who owns the organization, the approach of accounting for losses, management selection, and much more. The bottom line is that you should deliberate on your business structure as it defines the enterprise’s taxation, management, and ownership. This article will discuss the 6 most common business structures savvy entrepreneurs should consider.
Nonprofit businesses are tax-exempted; hence, they are highly regulated by the local governments. In some cases, a few friends feeling philanthropic can come together and decide to establish a nonprofit enterprise. The purpose of the organization is to help the community instead of enriching the founders. As such, nonprofits are eligible for tax exemption and hiring of volunteer staff.
A board of directors manages most of the nonprofit organizations. The board hires an executive director, a salaried worker, to run day-to-day activities.
During the registration of the enterprise, you should know that a nonprofit is different from the not-for-profit. Consequently, engaging an experienced attorney to educate you on non profit vs not for profit business structures is crucial to getting the business model right.
A sole proprietorship is an unincorporated enterprise owned by an individual. The owners contribute capital and take the whole profits so they are responsible for all enterprise liabilities, debts, and losses. Furthermore, the owner takes all the profits generated from the enterprise.
Since sole proprietors make business decisions independently, they require mentors to help them address complicated investment matters. Other values mentors provide to sole proprietors include:
- Advice unavailable in books
- Networking opportunities
- Investment reassurance
- Assists mentees gain emotional intelligence in the investment opportunities
- Motivation to invest in risky ventures
A partnership is an investment liaison between two or more individuals who collaborate to run a business. Every partner contributes to different factors such as expertise, money, labor, and property, in exchange for losses or profits.
Since many individuals own a partnership, the stakeholders should discuss different aspects of running an organization. Business experts recommend that the investors create a legal partnership agreement that identifies the manager, profit-sharing model, and investment growth opportunities, among other factors.
The legal partnership should also agree on matters such as:
- Philanthropic engagements
- Salaries and allowances of staff
- Business growth strategies
Limited Liability Company (LLC)
LLC is a widely used business formation among medium and small-scale enterprises. The laws regulating LLCs contrast from one state to another. The ownership in LLCs also varies significantly since individuals, a group of people, foreign entities, or corporations, may own the enterprises.
The taxation of LLCs differs depending on factors such as the number of owners and LLC elections.
Cooperatives enterprises are established to help groups of people, with common interests, pool resources. This business model is widely used in restaurants, healthcare, agriculture, finance, and retail sectors. The profits cooperatives generate are shared among the stakeholders, also called user-owners.
Usually, the members of cooperatives elect officers and a board of directors to run the organization. The management is supposed to seek current business information to maintain the enterprises afloat.
Regular members own cooperatives by purchasing shares from the institution. Each member has one voting right, irrespective of the number of shares one holds.
C Corporations is an autonomous legal establishment owned by its shareholders. Thus, the corporation is liable for debts and actions the business incurs instead of the shareholders. That means creditors cannot claim debts from shareholders, but they can sue the corporation.
This business structure is typical in large organizations that have several workers, as it demands complicated legal and tax filings. The administrative fees are also higher compared to simple enterprise models, such as partnerships and sole proprietorships.
The Bottom Line
Selecting a suitable business structure is critical since it influences the administration approach, taxation rules, and ownership.