Anyone who dabbles in business research for long enough will come across the idea of corporate structure. Aspiring entrepreneurs would do well to become familiar with this concept. A business’s structure or entity is the legal framework through which it conducts business. This encompasses aspects such as the business’s tax responsibilities, liability and growth potential.

Tax Responsibilities

A business’s tax responsibilities vary according to the type of entity it is. For example, a sole proprietorship usually consists of one person conducting business. Sole proprietors owe a 15.3% self-employment tax for certain types of income they make, but these steep tax costs may be offset by having few other administrative fees. S corporations have the advantage of being able to administer payroll through W-2 forms, so employees do not have to pay hefty income taxes after receiving their paychecks. These businesses are also small enough that they do not have to pay corporate taxes. C corporations do have to pay corporate taxes, but they also qualify for numerous tax breaks that can be quite beneficial to large companies.

Liability

Another important facet of the corporate structure concept is that of liability. Most businesses incur some risk in their operations, whether from customers or from partners. As such, businesses owners need ways to protect their assets. The only instance in which it makes sense to choose an entity that does not include protection is when you work alone with minimal business risk. In this case, you would be safe as a sole proprietorship. Limited liability corporations, S corporations and C corporations all offer varying forms of asset protection, so they are useful in partnerships, renting situations and any other business model where the owner may be vulnerable to litigation.

Growth  

Depending on the business owner’s goals for the company, certain aspects of entities become more or less useful. A sole proprietorship is not required to have a business bank account or a tax identification number. Since these things add administrative burdens, the benefits of not having them might outweigh the disadvantages in some cases. On the other hand, a more complicated entity like an S corporation has increased growth potential. Through their S corporation status, business owners are able to establish business credit, enabling them to borrow money and conduct other transactions solely in their business’s name. This opens the door to more possibilities for diversifying the company’s services.

When planning to start a business, be sure to thoroughly research each type of corporate structure. You must be realistic when deciding what will work best for your business and choose the entity that will enable it to operate at maximum efficiency.