When starting a business, an entrepreneur settles on a product or service that appeals to his or her talent and interests. The fun part of the process often includes selecting a name and a logo, perhaps finding a partner, sketching a business plan and deciding whether to open a storefront.
When the dust settles, and a newly minted business owner begins to dig the foundation, pour the concrete and start building the structure, some realities emerge. The entrepreneur faces unexpected financial issues, a morass of state and federal laws, tax responsibilities and an uncomfortable awareness of all the unknowns.
A business structure can make or break a company
Most entrepreneurs expect to make money doing something they love. Successful entrepreneurship requires short-term and long-term planning, not to mention all the unexpected items that crop up in between.
Starting with a good business foundation is ideal; however, it is never too late to shore up weak aspects of a functioning business.
Types of business structures
Basic business structures include the following:
- Limited Partnership: Also called an LP, a limited partnership is a relatively simple structure involving two or more people who share ownership in relation to the amount each contributes. The LP sets forth how each partner shares profit or loss to the business and designates each person’s role in the company.
- Limited liability company: Also known as an LLC, a limited liability company is an excellent option if a business will grow slowly. This structure provides flexibility, as it combines certain advantages of a partnership with those of a corporation. There are tax advantages to this type of business structure depending on the kind of business the entrepreneur plans to build.
- S-corporation: This type of business structure is, in some ways, a “lite” version of a corporation. It retains the desirable tax profile of a limited liability company but gains some corporation advantages. It can sell stock shares up to a set limit of investors.
- Corporation: A corporation is ideal for an entrepreneur who has expanded into a profitable business with several employees. Corporations are attractive to investors, and there is no limit on the opportunity to issue stock in the company.
An entrepreneur can progress from one type of structure to another. As a business grows, a different plan may increase advantage and temper risk. Successful entrepreneurs spend time and resources to learn about business structures and the advantages within each of them.