Why Corporate Structure Matters

Choosing a corporate structure for your business is an important decision. There are advantages and disadvantages to each model, and the perfect solution for one business could be a disaster for another one. Therefore, companies should carefully consider how they need their business structure to work for them. The three main ways that business structure can help a business are by offering liability protection, optimizing tax benefits and enabling business growth.

Liability Protection 

Your business entity will determine how well-protected your assets are. One way to consider which corporate structure to choose is by determining how much risk protection you require. If there is minimal risk to your business operations, as is the case in many freelance situations, it would be safe to choose sole proprietorship, which does not offer risk protection. Limited liability corporations, S corporations and C corporations do offer risk protection. With these business structures, businesses are protected from certain types of litigation, and the interests of any partners are secured.

Tax Benefits

A business’s corporate structure plays an important role in its tax situation. If your business is a sole proprietorship, then you will be subject to self-employment tax on all ordinary income. If your business is an S corporation, then you can withhold any taxes you owe by collecting payroll through a W-2. C corporations offer significant tax savings for large companies, but not for smaller ones. The way that your business is taxed is directly related to how much money you will be able to take home or put back into your business. Therefore, you must take care to choose the optimal business entity when it comes to taxes.

Business Growth

Another angle from which you can consider your decision on corporate structure is your goals for business growth. Certain structures restrict growth, while others enable it. For example, a sole proprietorship is by nature best suited to a business operated by a single person. If you decide you will need to take on a partner, then you should upgrade to an LLC to protect your and your partner’s interests. Establishing an S corporation allows you to generate business credit. This will eventually allow you to deal with financial matters solely in your business’s name. If you are heading a large company and have goals to go public, then establishing a C corporation is the best avenue. The tax write-offs that are open to C corporations are particularly beneficial to large companies.

The optimal entity choice will vary depending on your vision for your business. It is important to carefully discern which corporate structure will best enable your company to thrive.

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