One of the earliest and most important decisions an entrepreneur makes is the type of business structure they are going to form. Technically, it is possible to change the type of business someone runs after its initial establishment. However, it is often faster and more cost-effective to make judicious decisions about the business entity someone starts by thinking carefully about long-term prospects.
Particularly when an entrepreneur worries about liability, they may want a more formal business structure as opposed to a sole proprietorship, or even a partnership. Limited liability companies (LLCs) and corporations are often viable options for those who want to start a new business.
How can someone determine whether a corporation or an LLC is the best choice given their entrepreneurial aspirations?
Consider the long-term business plan
One of the most important factors when deciding between a corporation and an LLC as the ideal business form is the long-term plan for the company. LLCs are simpler to start, but they may not be the right option if someone hopes to grow their company into a nationwide leader in a particular industry.
Those aspiring to publicly list their business when it proves successful may want to start a corporation instead of an LLC. On the other hand, someone who only intends to operate a single business location or to keep the company regional may find that an LLC suits their needs. Establishing a plan for how the company may grow and expand over time can help an aspiring business owner choose the right entity to create.
Think about funding and taxes
Another key consideration when choosing a business entity is the financial impact of the business structure. A corporation can involve numerous investors who serve on the board that helps run the organization.
Corporations are also subject to their own depending on the type of corporate entity someone establishes. S corporations and C corporations have different tax rules, and not-for-profit corporations are subject to different rules when compared with for-profit businesses. LLCs, on the other hand, can be ideal for someone hoping to maintain sole ownership or only aspiring to cooperate with a small number of direct investors. The tax rules for LLCs are also different.
Thinking about a company’s growth, its overall business plan and the financial needs of the business both for funding and for minimizing tax responsibilities can help someone make the right choices about the structure they utilize when establishing a new company. Those who discuss their business aspirations at length with a professional may have an easier time choosing the right type of company to start.
