Deciding on the organizational structure of a business may not be as easy at it seems at first glance. Although the vast majority of small businesses begin as sole proprietorships, that isn't always the best organizational structure choice. It is often chosen for the sake of convenience rather than because it is the best structure for the business. Many problems can result from such an uninformed decision. Choosing an organizational structure for a business should be dependent upon the specific needs of the business over both the short-term and long-term; not either or. To determine which structure might be best for your business, follow the steps outline below.
Instructions
Create an Organizational Structure
1. Make decisions about how the business will operate in terms of raising money for its operation; whether or not it will have employees; with whom it will do business; who will be involved in the business and more. Ideally, all of this information will have already been outlined in a formal business plan.
2. Determine who will manage and operate the business. Will you do it alone or with other family members? Will outsiders be involved in management (other than in a consulting role)? Who is the business supposed to financially support? How quickly is that support required?If you (or you and your spouse) are the sole owner(s) and operator(s) of the business and it doesn't require funding outside of what you can provide or what you can raise through business grants and/or loans, then a sole proprietorship might be an appropriate organizational structure for your business.
3. If a sole proprietorship structure seems appropriate, file the paperwork for that organizational structure within your state. In most states, such paperwork is pretty simple. In some instances, it is as easy as opening a bank account in the name of the business and obtaining an Employer Identification Number (EIN) if your business intends to have employees. It is this simplicity that appeals to most new business owners. However, there are disadvantages as well. In a sole proprietorship, you and your business are considered one and the same so you are 100% liable for anything that happens within the business. This will mean that you cannot take advantage of some tax benefits offered to other businesses.
4. If you and a friend or family member other than a spouse intend to go into business together, without outside management or additional financial support other than what you can provide or what you can raise through business grants and/or loans, a general partnership may be just the ticket. This structure is also fairly easy to start in most states. As with a sole proprietorship, partners are each 100% responsible for what happens in the business, rather than the liability being divided across the board.General partnerships allow two or more owners to work in concert to run the business, sharing its income as well as its liabilities. In many states, such partnerships operate similarily to sole proprietorships and don't require a partnership agreement. However, entering into anything that involves money without everything spelled out in writing is ill-advised. If one partner makes questionable or bad decisions without telling his or her other partners, they remain responsible nonetheless.
5. A limited partnership is often entered into when a business needs to raise money for its operation quickly without a lot of complication. Limited partnerships are generally structured so that the general partner has total control over the way the business operates while the limited partners are there primarily for funding purposes. A partnership agreement may be drawn up in such a way as to give limited partners voting or veto rights or other responsibilities within the business. In any case, this organizational structure will require a formal partnership agreement. Some states require a certain type of documentation while others do not. To determine the requirements in your state contact the Secretary of State's office. He or she can provide you with any specific requirements made upon limited partnerships within that state.
6. A limited liability partnership is generally generally formed to help a business raise revenue while extending limited liability to those partners that provide such funding. It is a highly structured and complicated business structure that can have strict operational rules imposed upon it by the state. Because this form of partnership can be draw up in any number of ways, it is best to contact an attorney with expertise within that arena in establishing such an agreement.
7. Businesses that will have multiple owners and operators, will need a large sum of money to operate, carry a large assortment of employees, do business across state lines or internationally require a more complex business structure. The most common form is a Sub Chapter S Corporation. It is much more advantageous because it provides liability protection for the company's owners. The burden for what happens within the business is borne by the corporation itself. The structure also allows the company to sell shares of stock to family and friends; up to 75 people. (Note: Any advertised or intentional selling of stock outside of that falls under a set of rules outlined for public domain.) It also gives the business an opportunity to tap into a multitude of talent held by corporate stock holders. Additionally, this form of business has more tax flexibility than any other structure.Because a Sub Chapter S is highly structured, it provides a mechanism through which the business must operate. Some business owners find this too rigid while others appreciate the structure and protection that this business form offers. Sub Chapter S Corporations are generally regulated through the office of the Secretary of State. Those interested in this business form should contact that office for paperwork and assistance in meeting state requirements. There are also a multitude of books available on the market today to help a business owner walk through this complex business structure. The company will have to obtain a separate bank account in the name of the business, an Employer Identification Number, develop a set of articles of incorporation by which it will operate, and hold meetings of the owners a certain number of times each year.Sub Chapter S Corporations are filed as standard C Corporations in the beginning. The business has 75 business days to file for the Sub Chapter S status. Those failing to do so will remain C Corporations and will miss all of the tax benefits of a Sub Chapter S.
8. Businesses that will have multiple owners and operators, will need a large sum of money to operate, carry a large assortment of employees, do business across state lines or internationally require a more complex business structure. The second type of structure that might work for these requirements is the Limited Liability Company (LLC). Like a corporation, an LLC is more advantageous because it provides liability protection for the company's owners. The burden for what happens within the business is borne by the company just like in a corporate structure. The LLC structure also allows the company to sell pieces of the company to up to 75 "members". It also gives the business an opportunity to tap into a multitude of talent held by those members. Outside of the Sub Chapter S Corporation, this form of business provides the most tax write off capabilities.An LLC also provides a mechanism through which the business must operate. Some business owners find this too rigid while others appreciate the structure and protection that this business form offers. LLC are also usually regulated through the office of the Secretary of State. Those interested in this business form should contact that office for paperwork and assistance in meeting state requirements. There are also a multitude of books available on the market today to help a business owner walk through this complex business structure. The company will have to obtain a separate bank account in the name of the business, an Employer Identification Number, develop a set of articles of organization by which it will operate, and hold meetings of the owners a certain number of times each year.
9. Fill out the appropriate paperwork for the legal business structure you have chosen and follow any other requirements established by the state in which your business will operate.
10. Maintain the standards and paperwork required for the operation of your chosen business structure within the state where your business is located.
