If you’re thinking of starting a business, it’s important to choose the right company structure. There are several options available, and each has its own advantages and disadvantages.
In this blog post, we’ll take a look at the best company structure for startups in 2022. We’ll also discuss the pros and cons of each option, so you can make an informed decision. Stay tuned!
1. What are the different company structures available to startups in 2022 and what are their benefits/disadvantages?
There are three main company structures available to startups:
- Limited Liability Company (LLC)
- Sole Proprietorship
- Corporation
I’m going to discuss some of the key benefits and disadvantages of each structure below.
If you want to hire a company to form your business or are looking for more information on the web, check out the Financepond website for a list of business service providers and in-depth resources around LLC and corporations.
2. The pros and cons of a limited company structure for startups
Advantages:
– Limited Liability: All of the company’s businesses and financial debts are managed by the limited company. This means that a creditor can only attempt to collect from the assets held by that company, not your personal property or belongings.
– Simple maintenance: All business activities, including tax filing, can be easily managed by the company.
– Easy set up: Setting up a limited company with the right legal firm is easy and shouldn’t take longer than a week (depending on the state that you form your LLC).
Disadvantages:
– Not ideal for rising capital: LLC contracts can be more difficult and complicated to draft than corporate agreements. It is also possible to run into sticky and highly technical tax concerns that don’t exist or arise with other business entities.
– LLCs can make the tax situation for investors a bit complicated: investors are usually hesitant to invest in an entity taxed as a partnership because they would like to keep their tax situation simple.
– Hard for many investors to invest in LLCs: Investors such as angel or venture funds are unable to invest in pass-through firms since they have tax-exempt partners who do not want to receive active trade or business income due to their exemption.
Note: LLCs are most ideal for online, brick and mortar or ecommerce businesses.
3. The pros and cons of a sole proprietor structure for startups
Advantages:
– Less complicated to set up and run as a business: a sole proprietor is essentially the easiest business entity to form. You just have to register your business name and obtain some basic legal documents.
– Simple taxes: There’s no need to file a separate tax return for your business. As the owner of the sole proprietorship, you’re required by law to report all your income and expenses on your personal tax form.
– High levels of flexibility: You have full control of your company and can enjoy working on a wide range of business opportunities.
Disadvantages:
– No liability protection: As a sole proprietor, you are 100% liable for your business and there are no separations.
– Challenging raising capital: It’s difficult to raise capital for your business if you plan on running it as a sole proprietorship.
4. The pros and cons of a corporation structure for startups
Advantages:
– Company credibility: A corporation is typically viewed as an established business entity, particularly for larger companies. For smaller startups like yours, this can give you more credibility and help attract potential investors.
– Raising capital: Investors are typically more willing to invest in corporations because of their status as a legitimate company structure.
– Lower risk of creditors collecting from personal assets: It’s less likely that creditors will attempt to collect money from your personal property since the business is its own entity separate from yourself.
Disadvantages:
– Double taxation: Corporations are required to pay taxes on their profits at both the company and shareholder levels. This means that your business will have to pay taxes not only on its revenue, but also on the personal income of you and other shareholders who receive dividends or capital gains.
– More complicated structure: The corporate structure is much more complicated and difficult to manage than a sole proprietorship. It requires more formal contracts and other legal documents to set up and maintain.
5. Which company structure is right for your startup in 2022?
There are many things to keep in mind when starting a business, but the best company structure for your startup is most probably a corporation.
This will allow you to raise capital much easier and give you credibility as an established business entity, but it does come at the cost of double taxation for those dividends.
This entity will also make many investors more willing to invest because of its higher level of legitimacy compared to other business entities.
We hope this was helpful in your journey to launch your startup. Keep the points above in mind when making a decision and you should be on your way!
