9.30.2021

What is a Business Structure?

Written by Kit Jenkin

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Are you thinking of starting your own business? Before you start thinking about business plans and product design and marketing initiatives, you need to understand business structure.

Choosing a business structure will have long-term consequences for you and your business, and will affect how you structure your organization, how you pay taxes, and how liable you may be for business losses and debts. A lot goes into this decision, so it’s crucial to know what your options are. 

In this blog, we’ll take you through what a business structure is, how to choose one, and what all the different types of business structures are. 

Business structure definition

A business structure refers to how a business is organized, according to its legal status. 

Your business structure will state who owns the company, how its profits are distributed, how it will be taxed, and what roles will perform which tasks. 

Different types of business structure

There are several different types of business structures you can choose from. Each different type of business structure listed here may have different requirements depending on where your business is located. 

Sole proprietorship

A sole proprietorship creates a business that is fundamentally tied to the person who owns the business, both legally and professionally. There is no legal distinction between the owner of the business and the business itself. This type of business structure is often chosen by individuals looking to start a small business that they can run on their own, or with the help of a few employees. 

Benefits of creating a sole proprietorship:

  • No corporation tax: Sole proprietors are not incorporated, so they don’t have to pay corporation tax.
  • Direct access to profits: Because there is no legal distinction between the business and the person running it, all the company’s profits are your profits.
  • Easy to set up: Sole proprietorships are easy to set up, don’t require much paperwork, and the cost of doing so is much lower than other business structures. A large amount of paperwork comes when owners have to establish separate liability from their companies. 
  • No reporting: Depending on where you are located, you may need to file reports with your government to ensure your lists of members and managers are up to date. 
  • No formal business requirements: As a sole proprietor, you are not required to undertake certain operations other business structures are required to, including board meetings and formal reviews. 

Partnership

A partnership is exactly the same as a sole proprietorship, only with more than one owner. You often see this type of business structure in small firms like law firms, ad agencies or something similar. 

Benefits of creating a partnership:

  • Shared liability: Compared to operating your own business as a sole proprietor, a partnership offers mutual support and a more evenly spread liability if things go wrong. 
  • Experience: Each partner will bring their shared experience and contacts to their role, which will benefit the company
  • Better decision-making: Rather than relying solely on one person to make decisions, responsibility will be shared and more experience and perspectives can be brought to bear on a problem. 
  • More money, more capital: The more partners there are, the more capital the company has to fund its operations. 

Limited liability company

Unlike a partnership or sole proprietorship, a limited liability company (LLC) creates a legal distinction between the owners and the company. However, it still has flow-through income taxation (where the income of the business is filed as part of the owner’s personal income and not taxed separately). 

Benefits of creating a limited liability company:

  • Choice in taxation: As an LLC, you have the choice to be taxed as a corporation, sole proprietor, or partnership.
  • Easy to set up: LLCs are almost just as easy to set up as a sole proprietorship or partnership. 
  • Scope in shareholders: When you create an LLC, you can do it with just one person or with multiple people.
  • Limited liability: Because creating an LLC creates a separate legal entity from the owners, the owners cannot be liable for any debts or losses incurred by the company. 
  • More money: Members can receive revenues and write off forfeitures that are larger than their individual ownership percentage. 

Corporation

A corporation is a legal entity separate from its owners. Corporations can be owned by individuals or other entities. Ownerships can be bought, sold, or transferred via the exchange of stock. A corporation can enter into litigation on its own, protecting shareholders from personal liability. 

Corporations have a far more formal structure than other business structures. Depending on where it is incorporated, a company will need to follow certain requirements, such as filing articles of incorporation, creating corporate bylaws, and more.

Benefits of creating a corporation:

  • Personal liability protection: The owners of a company cannot be sued or held liable for the actions or losses of the company. 
  • Business security and perpetuity: Ownership of a corporation is very flexible since shares can be bought or sold.
  • Access to capital: Corporations can easily raise capital by creating a selling stock.
  • Tax benefits: Some types of corporations, like S corporations, receive certain tax benefits.

How to choose a business structure

Choosing a business structure is one of the first things you should do when starting a new business. Choosing the right business structure will make a massive difference in how your business performs in the future. 

Take a close look at your business. Are you just on your own, or do you want to include other people in your business structure? How do you want your profits and your employees to be taxed? Do you want full control over your business, or do you want other owners and stakeholders involved?

Once you have an idea of how you want your business to operate, an appropriate structure will suggest itself. 

When to change your business structure

Many companies start out with fairly simple business structures, like sole proprietorships or partnerships, but change to more complex structures (LLCs or corporations). 

This is done for a variety of reasons. The business may be getting too complex or risky, and they feel they need the protection limited liability can give them. They may also decide that their business would benefit from the stability and certainty that full incorporation provides. Or, they may decide to change business structures in order to respond to tax needs.

While it’s less common, some businesses do go the other way, changing from corporations or LLCs to sole proprietorships to partnerships. 

Invest in great tech

No matter what business structure you choose, you need to invest in powerful technology to ensure your business runs as smoothly as possible. The best way to do this is with a state-of-the-art POS system. 

Epos Now offers both dedicated retail and restaurant POS systems that will help you take your business to the next level. 

  • Onboard and train staff in minutes​
  • Seamlessly add eCommerce, Click & Collect or delivery ​
  • Track margin data to identify your most profitable products​
  • Save hours of time with automated, real-time stock counts​
  • Integrate with your preferred payment partner
  • Synchronize your front & back of the house to increase sales and table turnover
  • Integrate with major food delivery apps to win more customers & drive revenue
  • Access your data 24/7 from any device, to make smarter business decisions
  • Drive repeat business and loyalty via CRM & promotions

Contact Epos Now to learn more about our systems.

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