Starting a new company is a challenging undertaking. Investors and entrepreneurs have to plan carefully to optimize their chances of success and limit personal exposure.
The decisions made early in the business formation process can have a major impact on the long-term success of the organization. One of the most important decisions made early in the startup process is the type of business to establish.
Those planning to start a new business may need to consider each of the factors listed below carefully before choosing the type of business they establish.
1. The scope of the company
The bigger the business may become, the more important a complex business structure may be. People intending to operate on a local basis might want to start a partnership or limited liability company (LLC). Those intending to operate on a statewide, national or global scale may need to develop a more complex business structure.
2. The amount of potential liability
Every business concept comes with a different amount of potential liability. Investors and entrepreneurs can have personal financial and legal culpability if they do not create an appropriate business structure to protect them from exposure. The greater the risk of liability, the more important a degree of separation from the company becomes.
3. The sources of startup capital
The way that an entrepreneur or investor intends to acquire startup capital can influence the best type of organization to establish. Those who need outside investors may need to create a more formal business structure when compared to those who intend to provide all of the startup capital for the operation on their own behalf.
4. Tax considerations
There are different tax rules that apply to different types of businesses. Factors including how much profit the company might generate and whether the owner has an outside source of income can influence the best business type to establish. Looking at the business plan can help people determine the best way to minimize tax liability.
5. Long-term plans
Those intending to create a business for the purpose of building and selling it to an outside party for profit may have different needs than those who want to run a business until they retire and then dissolve the company. The objective that motivates the creation of the business can influence the right way to structure it as well.
Exploring plans for a company with an attorney may help an aspiring business owner choose the best option available to them. The structure of a business can have a major impact on liability and finances as the company grows.