Choosing the right business structure is easy if you ask the right questions. And it is not only very important to get your business up and running but it will have long term impacts. So let’s start with a briefing on business structure and what are the important factors that you need to consider followed by a small questionnaire. So that you will find what business structure is best for you by the end of the article.
How to choose the best business structure for your needs?
The business structure is the legal design of your business as part of the registration process that decides the ownership, liability and taxation terms of all other guidelines it brings with.
There are four major types of business structures which we have discussed in depth in the previous article. Don’t worry we will cover it with the flow in this also.
Following are the reasons based on which one can pick the best business structure for themselves
Number of Owners
It can be a defining factor of the business. If you are a single owner you have only two options to go forward – Proprietorship or One Person Company. If your business is going to have more than one owner then you have a lot more to explore.
Control over the Business
The business structure decides how and who controls the business. For instance sole proprietorship and general partnership let’s the owners make all the decisions. On the other hand, corporations, LLP and LLC require voting, selection of managing partners who then make decisions for the business.
Level of Liability
Personal liability is the capacity for a legal body to acquire the owner/shareholder’s asset for the debts of the business. The personal liability is limited to the amount of shares held in corporations and LLC. But with informal business structures (proprietorship and partnership) the owners are personally liable. Do a basic risk assessment on the field of business before deciding on the liability factor.
Company Formation and Administration Costs
Formal business structures (corporations and LLC) are going to be comparatively pricey to set-up as they have to go through a complicated process. You will need attorneys and accountants for the maintenance of accounting records throughout the life of the business. On the contrary, informal business structures can have simple accounts.
Taxation
Tax is one of the important factors that make or break a business structure for you. Corporations need to pay corporate tax and the shareholders have to pay a tax on their income causing a double taxation situation. Choosing any other business model can give a significant benefit by avoiding a huge chunk of taxes. Or you can even consider tax free zones, off-shore corporations to evade as much tax as possible.
Ability to Raise Capital
Capital raising is a path to grow for most businesses. So if you’re planning to raise capital through venture capital or public listing make sure the business structure allows for it in your jurisdiction.
Credibility & Reliability
Corporations and LLC are named formal business entities for a reason. They have laid structure of organization and are accountable in every aspect. It makes the company more reliable for investors and collaborators. Being a corporation you might be able to acquire bigger projects and partner with established companies.
Major Business Structures Compared
| Business structures | Sole Proprietership | Partnership | Corporation | LLC | ||
| General Partnership | LLP | C-Corporation | S-Corporation | |||
| Is the business structure single person owned? | Yes | No | No | No | No | No |
| Do I get complete operational control? | Yes | Yes, shared among partners | No | No | No | No |
| Is the business ideal for shops, home businesses and local shops? | Yes | Yes | No | No | No | No |
| Do I get all the profits without business tax? (pass-through taxations) | Yes | Yes, shared among partners | Yes, Shared among partners | No | Yes | Yes |
| Are my personal assets at risk for the business debt? | Yes | Yes | No | No | No | No |
| Can you employ staff, expand business into new locations? | Yes | Yes | Yes | Yes | Yes | Yes |
| Can I get paid an wage/compensation for involvement in the business? | No | No | Yes | Yes | Yes | Yes |
| Do I have to pay corporate tax? | No | No | No | Yes | No (might vary with jurisdiction) | No |
| Do I get an option to split income for reduced Income tax? | No | Yes | Yes | Yes | Yes | Yes |
| Is the business setup process complex and costly? | No | No | yes | Yes | yes | Yes |
| Do I have to maintain, audit & submit complext account statement? | No | No | Yes | Yes | Yes | Yes |
| Is it easy to raise capital through venture capital, investers and public listing? | No | No | No | Yes | No | No |
| Is the business suitable for high risk business? | No | No | Yes | Yes | Yes | Yes |
| Is this ideal for rapid growth and expansion across jurisdiction? | No | No | No | Yes | Yes | Yes |
| Can I change legal structure in the future, easily? | Yes | No | No | No | No | No |
| Can the company benefit from unique industry base tax benefits? (like EV tax benefits) | No | No | No | Yes | Yes | Yes |
If you are stuck between the rows and columns, try this simpler version of whom it is ideal for.
Business Structures Vs Nature of the Business.
| Ideal for | Sole proprietership | Partnership | Corporation | LLC | ||
| General Partnership | LLP | C-Corporation | S-Corporation | |||
| Owners | 1 | 2 to 9 | More than 10 | Unlimited | Less than 100 | Unlimited |
| Risk | Low | Low | Medium | Medium-high | Medium-high | Medium-high |
| business volume | Low | Low-medium | Medium-high | High | High | High |
| Growth and expansion | Very less | Very less | Intermediate | Fast | Fast | Intermediate |
Hoping the questionnaire and charts help you make an informed decision. You might still be worried about the company formation and/or taxation. Don’t worry, we have got you covered on it.
We offer consultation on company formation, financial structuring and tax optimizations.
We help you further reduce the tax by suggesting ideal tax-free zones for your company. For instance, you can save upto 20% of your running cost just by opening your company in one of UAE’s freezone. Ask how? Free zone companies aren’t charged any tax on import and export. The only tax your company has to pay is the 5% VAT that is comparatively less than most tax free zones around the world, which is why Dubai is a heaven for D2C businesses.
Want to find the best company structure and financial structure for your company? Quick, book your free consultation call here.
