Why Defining a Corporate Structure for Startups Matters?
Keyword: organizational structure for startups, best company structure for startups
A clear corporate structure, including job descriptions, makes a company more attractive to investors as it is an important attribute to fund a company for serious investors.
Corporate structure refers to how a company is managed to attain its defined objectives. A corporate structure is important because it specifies the ownership of shareholders, the authority of administrators over the day-to-day operations, and control exercised by the board of directors.
Types of corporate structure available
- Sole Proprietorship
A sole proprietorship is a firm wholly controlled by a single owner. The business and the owner do not have different legal identities here. It is hard for sole proprietors to raise capital for growth.
If two or more individuals are looking to own a business, a partnership is the simplest structure to own a business together. A partnership can be a limited partnership (LP) or limited liability partnership (LLP) under a partnership agreement. The general partner of LP carries unlimited liability, unlike other partners. The partners of an LLP are not accountable for other partners’ actions or liabilities.
- Limited liability company (LLC)
A business registered as LLC can take benefits of the corporation as well as partnership business structures. Personal assets can not be sold to meet business liabilities if the company goes bankrupt. LLC members are considered self-employed.
Corporation or C Corp
A corporation or C corp has a different legal entity from its owners. It involves more extensive tax compliance. The cost to register a corporation is high. Corporations pay income tax on annual profits and dividends paid to their shareholders. It has the advantage of raising capital through stock.
An S corporation or S corp has an independent identity from its owners. This type is developed to avoid the double taxation faced by the C corps.
They are the same in the taxation process as C Corp but different in purpose and accountability.
Other organizational structure for startups can be Nonprofit corporations, Close corporations, and co-operative.
Which structure is better?
The Best company structure for startups can be defined as follows:
- A sole proprietorship is a good option for low-risk business ideas to test a business idea before registering it.
- A partnership is a good choice to establish a business with many business owners or professional groups that intend to test their business idea before registering it as a more formal business.
- An LLC is a good option for medium or higher-risk business ideas, individuals having significant personal assets, and ones looking to reduce tax rates.
- A corporation is a good option for medium- or higher-risk business ideas that plan to “go public”.
Most individuals think of their companies’ corporate structure more broadly, and before getting there, consult with an advisory firm to see which corporate structure makes the most sense for you. If you are looking for an experienced service provider for Assistance for Corporate Structuring, you can consider Boston Financial Advisory Group (BFAG).
Boston Financial Advisory Group provides the best accounting and financial services. We have a team of experienced professionals who can help you in maintaining your books of accounts.
So, get in touch with us to avail our services.
Contact us in case of any assistance or queries.
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