People hoping to start a business need more than just a good idea. They need a plan, investment capital and a business entity. The process of creating a company often begins with an idea or with access to investment capital.
The aspiring entrepreneur then researches the market, fine-tunes their business plan and establishes a formal business entity. There are many different structures or types of businesses that people can establish. Asking the questions below can help aspiring business owners choose the right form for their company.
What are the one-year, five-year and 10-year plans?
The short-term and long-term plans for the business have a direct impact on the best structure to establish. Those intending to grow a large organization may want to consider more formal business structures. On the other hand, those simply performing contract work may choose something simpler, such as a limited liability company (LLC) or even a sole proprietorship. Considering the short-term and long-term plans for the organization can help the person starting the business choose the right structure.
What outside resources does the business require?
Some entrepreneurs require funding from financial institutions, capital from investors or support from a business partner. The potential sources of business funding can sometimes influence the right structure to use. Formal structures, such as corporations, can make it easier to attract investors and qualify for loans or attract shareholders to invest. Other times, the entrepreneur may have the financial resources to start the business, but they may lack practical experience running a company or industry connections. Partnerships and LLCs with multiple members are often viable options for those who need support from others to successfully operate a business.
How much liability could operations generate?
There are risks inherent in every industry. Each different business structure provides unique protections for owners and those operating the business. The right business structure can significantly reduce the legal and financial liability of the business owner. When combined with appropriate insurance and adequate contracts, the right type of business can limit the risk that the entrepreneur has to accept when starting the company.
Making an objective decision about what type of business structure to use can be challenging. Those aspiring to start a company may need help choosing a structure, drafting formative documents and optimizing their personal protection. Many entrepreneurs require legal support as they develop a business concept and start an organization, and that’s okay.