Having the appropriate business structure for your company is an important foundation for success. The US Small Business Administration even lists choosing your business structure as the second-most important step to launching a business. “You should choose a business structure that gives you the right balance of legal protections and benefits,” they write. The business structure you choose affects taxation values, daily operations, and even legal liability. The IRS identifies the main business structures in the US: sole proprietorship, partnership, corporation, and limited liability. Sole proprietorship gives the business owner/s total control. A partnership, on the other hand, is run by at least two persons who have equal share in the company’s profits and losses. With corporations and limited liability companies (LLC), the business is treated as its own legal entity. Each business structure has its own strengths, and you should make sure that you choose the right one to ensure your business thrives.

Since deciding on a structure is a crucial point in your journey, consulting with business counselors, attorneys, and accountants may be helpful. A business structure can determine your company’s success in the long run and quite early on too.

The number of owners

Business structures like sole proprietorships and LLCs can have just one person run the business, while others may require at least two, as seen in partnerships and corporations. Is it ideal for your business to have multiple owners? Or does it require just one person calling all the shots? These are the questions that need to be answered before you decide on a business structure. Rod Howell states that choosing the correct structure for your business ensures it runs smoothly. More than just having the optimum number of business owners, you need ones that also share the same values and goals as you.

How liable you are for your business’s assets

Whether you’re venturing into a small enterprise or a high-risk business, it’s important for you to understand that business structures can affect your legal liabilities.

For sole proprietorship, the business owner is directly responsible and legally liable for any damages or suits incurred by the company. This means that your business and personal assets are lumped together—which may even be beneficial for small home-based businesses. However, this may become a problem for industries that have more risk involved. LLCs and corporations create a separation between business owners’ personal assets and business assets, offering them an added degree of protection.

The taxes that you’ll have to pay

All businesses are required to pay federal, state, and local taxes to stay in good legal standing. And the amount of taxation depends on your business structure and location. Often conditional on the state you are in.

So if you’re forming an LLC in California, your business won’t be required to pay federal taxes, other than the annual $800 fee, but as a business owner, you’ll be required to pay income taxes. With taxes in California being among the highest in the country—going up to 13.3%—this can be a significant blow. Meanwhile, establishing your business in Wyoming could mean you save a lot of money. The state has no individual income tax, and it’s also one of the only two states that don’t charge corporate income taxes or gross receipts taxes. Since taxations depend greatly on business structure, you should make this key decision with state taxation regulations in mind.

Lawyer writing paper on a desk

The industry in which you operate

Most industries employ a default business structure. Joshua Stowers reports in a Business News Daily article that small businesses typically favor a sole proprietorship, while the finance and law industries often choose an LLC. Enterprises dealing with higher risks form LLCs because of the liability protection it provides business owners.

It’s also typical for companies that offer professional services to form partnerships for flexibility and relatively easy maintenance, for example. When you do your business plan, do research on which business structure is typically used in your industry and analyze if and how it could benefit your business.

While it’s possible to shift to a different business structure in the future, there may be tax implications, state-imposed restrictions, and other complications. So be in the know and become even more business savvy by going through the rest of the Somiibo blog.