5 Reasons Why Your Business Structure Matters

There’s no single “best” business structure that fits all companies, but choosing the right one is definitely important. And it is especially crucial if you’re starting a business during COVID.

Any startup will need to have a strong start and even stronger foundations in order to be successful:

• An agile mindset,
  
• A mapped out risk analysis and management plan, and
  
• The right business structure for your company

While your initial choice of structure may change down the road, you need to make sure that you choose the right one early on to get your business off the ground.

The Filing Process

Registering your business is one of the most important steps in starting any company. The paperwork you need to process could vary depending on the business structure you choose.

To start sole proprietorships in Arizona, you need only begin doing business in order to be considered as one. On the other hand, forming an LLC in Arizona involves filing Articles of Organization with the Arizona Corporation Commission, which will require a $50 filing fee and an additional $35 for expedited processing.

This is similar to forming an LLC in New York where you’ll have to pay the New York Secretary of State $200 upon filing the Articles of Organization.
Additionally, LLCs in both states are subject to a “Publication Requirement,” where they’ll have to publish a Notice of LLC Formation in general-circulation newspapers in the county where the company is registered.

For several startup companies, the documents and other requirements that need to be processed can become overwhelming, so it’s worth considering whether you want to start off as a sole proprietorship or immediately register as an LLC or a corporation.

The Annual Fees and Taxes

Fees and taxes will constantly be a part of your business considerations moving forward, and they’re highly dependent on your chosen business structure.

The International Revenue Service considers the following as “flow-through entities”:

• Sole proprietorship
• Partnership
• LLC

The profits and losses of these companies are coursed through the business owners, who then report this information on their personal tax returns. The businesses themselves don’t need to pay federal income taxes since they’re not considered separate entities, unlike corporations.

Corporations may be subject to double taxation: (1) Corporate profits and (2) Dividends.

Currently, there are six states—Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming—that don’t have corporate income tax. So what corporations in Arizona and other states can do is register to become non-profit entities to be tax-exempt.

Your company will be considered a non-profit corporation when it’s structured to benefit:

• The general public
• A specific group of people, or
• Members of the organization itself.

Your Liability

Starting a business comes with risks, and your business structure can determine how much of these risks you’re liable for. In sole proprietorships and partnerships, the business owners are held responsible for the debts and obligations of the business.

Moreover, in partnerships, all partners are equally liable for each other’s acts while in business. In those cases, liabilities can be paid through seizure of the owner’s and any of the partner’s personal assets.

But you’re not entirely on your own, state laws require businesses to have specific insurance policies to help you out.

Businesses in Arizona, for example, are required to have workers’ compensation insurance. This means that workers will receive medical benefits and compensation no matter what causes their job-related incident, and not at your personal cost.

While most states require workers’ compensation insurance, there are still states like Texas and New Jersey that don’t mandate this type of insurance coverage.

If having a legal separation between your personal and business assets is what you need, then you can opt for forming a corporation or LLC instead. With an LLC, your personal liabilities are capped, therefore offering you a degree of protection should your business incur damages and suits.

In corporations, businesses are considered separate entities, with their own rights and responsibilities separate from the owners.

The Flexibility of Your Management Structure

A business thrives when both the company’s and the owners’ needs are met, so the management structure needs to be flexible and agile.

For sole proprietorships, the owner:

• Has absolute control over all the business operations
• Can make top-level and organizational changes, and
• Can dissolve the business at their own discretion

For business structures with multiple stakeholders like partnerships and corporations, it gets a little more complicated. A number of C-level executives would have to discuss and agree on any single decision that involves the company.

The Ease at Which You’ll be Able to Generate Funds

Sufficient funding keeps a business running, so it’s important to build connections with banks and other financial investors. In fact, you can already start building credit score by opening a digital bank account.

Established partnerships, LLCs, and corporations are at an advantage since investors are often open and willing to lend them credit.

However, you may find that investors can be reluctant to give business loans to sole proprietorships. Investors perceive sole proprietorships as more high-risk when it comes to their ROI. Sole proprietors may have to use their personal assets or look for grants that can provide them with financial aid from the SBA and other similar organizations.

There are a lot of funding resources for Arizona business owners—and for all types of businesses, too. It’s a good idea to talk to these organizations and other possible lenders before committing to obtaining a business loan or a merchant cash advance.

Choosing the right business structure is important because it can affect the course of your business in the long run. It will also help you determine how to run your business. No matter which business structure you choose, you can benefit from the Kanban system. Try out any of our Kanban Zone plans and see your work efficiency improve drastically!

Consider what you and your business need, and you’ll definitely be able to steer your company to success.

This was a guest blog. Please review our guest blog disclaimer.