Among the many choices the entrepreneur faces in setting up a business from scratch is deciding upon the type of structure he/she will set as the framework for the enterprise.
Sometimes the alternatives are few and the choice is readily apparent. At others, it may be difficult to know what's best.
Typically, the decision about the structure of your business is influenced by the following factors and the answers you come up with to some pertinent questions like:
1. What's my vision, long-term, for the business? Do I plan to stay a small solo business or do I have a more grandiose vision of a large corporation looming in the future?
2. Do I plan to seek help in the ownership or management of my firm? Do I plan to keep firm control of my business or am I willing to give up a substantial portion of the control and assets?
3. What is the best organization method given my tax situation, my other annual earnings, investments and assets, and my willingness to expose my current personal assets to law suits, liens, collateral status, etc.
4. What is most cost-effective and practical for the type of business I have?
5. What structure will allow me to keep the largest percentage of the after-tax profits, and at the same time, avoid the most hassles?
6. Will there be any unwanted constraints placed upon me or the business by the city, county, or state if I organize in a certain way?
7. What structure affords my business the best legal and asset protection?
8. Do I want to be in a position to seek outside investment? How am I going to finance my business if I decide to expand and grow beyond my personal capacity to fund the growth?
9. How are the other top businesses (my competitors) in my niche structured? How long have they been in existence? Do they know some things that I ought to learn from? Can I follow their example?
10. Will my business structure be dictated by my suppliers and wholesalers? If I have a sole proprietorship will that negatively impact my status in the eyes of those whom I rely on for goods and/or services?
By answering all these questions, or at least considering these issues, you should have a fairly good feel for several issues:
- Whether you plan to grow your business and expand into a larger and more complicated enterprise in the future;
- How you feel about personal risk and exposure to legal actions;
- How much of your "baby" you're willing to share;
- How you can avoid excess work, paperwork, and undue stress.
Here's some good news. While it's best to anticipate the longer-term success of your business, the structure can be changed as the business develops and matures. You won't be limited to riding the same horse over the complete journey.
Many solo entrepreneurs begin as sole proprietors and move to partnerships and corporations as the business activity warrants. Usually it's the need for help in managing or financing the business that dictates this type of move.
We'll review the pros and cons of differing structures in another discussion.
