Business owners usually dedicate a lot of time and research to determining which type of structure works best for them. Some of the factors that they might consider are:
- Size: How big is the business? Size can influence structure. Someone who wants to start a small business in his or her basement, for example, might opt to create a sole proprietorship. That wouldn't work for someone who wanted to start a manufacturing plant.
- Capital: How much money is available to invest in the business? The costs involved in starting a business can be a major factor in determining which business structure is most suitable. A sole proprietorship will require much less capital than a corporation, for example.
- Time: How much time will be dedicated to the business? Here, too, if a person is running a part-time enterprise, something as complex as a corporation may not be necessary.
- Personnel: Will the business have employees or other necessary staff? If so, having a corporation, S corporation or an LLC will make it easier to acquire employees.
- Expected returns: How much money is the business expected to earn? If the expected profit is going to be small, a business won't need to make the same tax considerations that other businesses might.
- Taxes: Which method of taxation best suits the needs of the business and the owners? Sole proprietors and members of a partnership each file taxes individually. Members of an LLC can file as a sole proprietorship, a partnership or a corporation, depending on how it is structured. Shareholders of S corporations file taxes individually as well.
- Location: Where will the business be located? On the state level, laws can differ with regard to how businesses can function. The location of a business can affect taxation, how a business operates, and how it develops. In Washington, for example, low taxes make incorporating a business more desirable than in other states where taxes are higher. The same holds true for the state of Florida, where low tax rates make it a desirable destination for businesses.
- Liability: Who is liable? Depending on the type of business being considered, there may be the chance that the business could run into serious financial trouble. Owners that intend to operate businesses where debt might be a major consideration might need to find a structure that offers greater personal asset protection than someone who starts a business that would not acquire much debt.
Next, let's look at the paperwork path of incorporation.