Starting a business is more than just finally making your dreams a reality. It requires many critical factors – some of which you may have not even thought about yet. One such factor is determining how you want to set up your business.
Business formations are crucial to the success of a company. Choosing the right business formation ensures that your company functions as intended and protects you from liability claims.
Every business formation has its benefits. Before you’re carried away with the excitement of starting your business, review each type of formation and pick the one that fits best.
1. Business partnerships
Going into business together with a spouse, best friend, or family member is common. Having someone to share the weight of the business can make the challenges less daunting. Business partnerships are a great option as each partner is personally liable for any company debts or claims. This means you won’t have to shoulder any liability issues on your own, as is the case with the next option.
However, working with a partner can come with risks when you don’t see eye-to-eye. Creating a partnership agreement is an ideal way to ensure that you split your responsibilities and profits evenly.
2. Sole proprietorship
Sole proprietorship is just as it sounds – you are the sole owner of the business. This kind of formation provides you all the control but can come with risks. If you face any liability claims or debts, you will be personally responsible for them alone, which can be extremely challenging both emotionally and financially.
Sole proprietorships are easy to establish as they don’t need state registration or much paperwork. Instead, you pay business taxes as part of your personal taxes for a more streamlined process. If you’re planning a small, low-risk business, this type of formation can be the best choice.
If you want more protection or you’re expecting to grow your business quickly, establishing a corporation may be your best bet. Corporations function differently than the previous two options, as they are their own legal entity. Corporations pay their own business taxes and can face liability claims which shield the owners from any damages.
Corporations can be challenging to set up and require more reporting and record-keeping. However, if you believe your business may face serious legal issues or other challenges, having a corporation to protect you can be an asset.
Deciding what’s best for your business can be difficult. It’s essential to take time to consider your options and talk to a business law attorney who can help clarify what you can expect out of each type of formation.