Selecting an Entity Structure Helps Build a Strong Financial Foundation for Your Business

Running a successful business depends on a solid financial foundation. You can have the most sought-after products or services, a killer marketing strategy, and loyal customers, but if you don’t have a solid financial foundation to manage cash flow and support other business decisions, it can all come crumbling down. Continue reading to learn how selecting an entity structure can help build your financial foundation.

Running a successful business depends on a solid financial foundation. You can have the most sought-after products or services, a killer marketing strategy, and loyal customers, but if you don’t have a solid financial foundation to manage cash flow and support other business decisions, it can all come crumbling down.

The entity structure you choose for your business can influence several aspects of your business’s financial foundation, including:

●    The costs of formation

●    The ability to get financing or raise capital

●    Possible personal exposure to financial risk

●    Taxes and the associated costs of paying them

There’s no one “right” structure for every business – it depends on your needs and goals. Here’s a look at some of your options and some of the financial pros and cons for each.

Structure

Pros

Cons

Sole Proprietorship

● Low startup costs. Setting up a sole proprietorship requires very little paperwork or legal formalities. Depending on the laws of your state or city, you may just need a business license or permit.

● Uncomplicated tax structure. No separate tax return is needed. Business income is reported on the owner’s individual tax return.

● Financial Control. You have sole discretion over business spending and get to decide how to use business profits.

● Personal Financial Risk. The business owner is personally liable for all business debts and obligations.

● Limited funding opportunities. It may be difficult to raise cash or arrange long-term financing.

Partnership

● Pass-through tax structure. Similar to a sole proprietorship, income “passes through” to the partners and is reported on their personal tax returns.

● Greater resources. A partner can bring an infusion of cash into the business. You may also benefit from partnering with someone whose skills and experience complement your own.

● Personal Financial Risk. Like a sole proprietorship, partners are personally liable for business debts and obligations.

● Limited exit strategies. Exit strategies must be negotiated with all partners, which could increase the cost and difficulty of exiting.

LLC

● Flexible tax treatment. An LLC may elect to be taxed like a sole proprietor, partnership, S corporation, or C corporation, which can affect how owners are taxed.

● Less paperwork. LLCs don’t have to observe many of the formalities that corporations are required to follow, such as holding annual meetings.

● Flexible profit distributions. LLCs aren’t required to distribute profits equally to all members.

● More paperwork and fees than sole proprietorships or partnerships. LLCs typically need to file annual reports with their state and pay a filing fee.

● Limited funding options. LLCs may find it difficult to attract outside investors.

S Corporation

● Pass-through tax structure. Business income “passes through” to shareholders’ personal tax returns.

● Potential tax savings. Owners may be able to save on self-employment taxes.

● More paperwork and fees. S Corporations must file official documents with their state, hold regular shareholder meetings and pay annual filing fees.

● Ownership restrictions. S corporations cannot have more than 100 shareholders and shares cannot be owned by foreign shareholders, certain trusts, or other corporate entities.

● Rigid income and loss allocations. Every shareholder of the S corporation has equal rights to profit distributions.

C Corporation

● Funding options. C Corps can issue stock, so it’s ideal for businesses that want to attract outside investors. Banks may also be more willing to loan money to an incorporated business.

● Potential tax savings. The business pays taxes on profits. Shareholders are only taxed when they are paid out in the form of salaries or dividends.

● Easy transfer of ownership. Shareholders can easily sell or transfer their interest in the business.

● More paperwork and fees. C Corporations must file documents with their state, hold regular shareholder meetings and pay annual filing fees.

● Double taxation. Profits are taxed once at the corporate level and again at the shareholder level when paid out as dividends.

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It’s a good idea to plan ahead for your business needs and choose the best structure for your growth plans and goals. That way, you’re ready to take advantage of any tax benefits or funding opportunities that come your way. However, if you outgrow the benefits of your original business structure, it’s possible to restructure later.

You don’t need to be an accounting or tax expert to build a strong financial foundation for your business. If you don’t know where to start, you don’t have to handle it alone. When you work with Decimal, you simply connect all of your financial accounts and let our professionals reconcile your books. We can also facilitate access to payroll management, streamline bill pay and find help in our partner network for other financial needs. With our help, you can build a financial foundation that will meet your needs so you can focus on other key areas of your business.

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