AIU Blog

The AIU blog shares ideas, information and tips aimed at helping you get ahead personally and professionally, with topics ranging from online learning success to career development.


How to Choose Your Business Structure

In this series, entrepreneur, business consultant and AIU School of Business faculty member Belinda Smith, Ph.D., will lead aspiring business owners through the essential steps of creating a business plan.


If you're planning to start your own business, you must decide on a business structure. Establishing a business structure is a governmental requirement owners must perform before operating legally within a city, county, state, or country. Owner(s) must follow these laws from the start of their business; if they do not, they can be forced to close or be heavily fined.

There are four basic business structures: sole proprietorship, partnership, limited liability company, and corporation. A sole proprietorship is generally easier and less expensive to form. Some counties do not require the business owner to do anything but pay taxes. However, it is recommended that sole proprietors register their business as a "Doing Business As" (DBA) at their county Register of Deeds office if the name of the business is different from their own name.

At the other extreme are corporations. For-profit corporations offer shares that must be valued before they are offered to shareholders. This normally requires the assistance of a certified public accountant (CPA) knowledgeable about valuing shares. Corporations also require legal bylaws, rules and regulations. This normally requires the assistance of a lawyer. Forming corporations often requires an annual cost — $125 in most states — and require submission of paperwork to the Secretary of State for the state in which the business operates.

Listed in the table below are a few advantages and disadvantages of each business form. Before moving forward with your choice, contact your county and state offices to ensure you are following all legal requirements for your business type.



Business Structure



Advantages



Disadvantages

Possible

Business Types

Sole Proprietorship Least amount of paperwork

Legal fees to form business can be zero

Owner's personal property is at risk to pay business debt

One person is responsible for the success of the business

Pattern Maker



Consultant



Caterer



Photographer

General Partnership Easy to form, but a formal partnership agreement should be in place

Two or more people bring money, knowledge, skills and abilities to the business

All owners' personal property is at risk to pay business debt

Business can end when partners do not agree

An inventor, manufacturer and marketer



A designer and a pattern maker



A chef and restaurant manager

Corporation Owners' personal property are not at risk if the corporation is formed correctly

Ability to raise capital by selling stock

Expensive to form

Give up control to shareholders

Grocery store



Sports bar



Restaurant



Boutique

Limited Liability Company Typically members' personal property is not at risk to settle business debt

Less paperwork to form compared to a corporation

Members leaving may cause business to legally dissolve

Maybe difficult to acquire investors

Caterer



A designer and pattern maker



Sports bar

Not-For Profit Corporation Opportunities to obtain grants

Opportunities to obtain products at a reduced cost

Raising funds are difficult and ongoing

Government monitoring

A business formed to assist disabled veterans



A business formed to assist pregnant teens

When deciding on a business structure, consider the cost to form the business. Realize that there may be an annual cost to operate a business legally. Ensure you are following all legal requirements to operate your business type. For example, if you are providing food to the public, check with the local health department to ensure you are following their requirements.

Get ready to crunch numbers. In the next blog, I will discuss how to determine start-up costs.

Considering starting a business? Download our guide, "The Value of A Business Degree in Today's Challenging Economy."

Don't forget:
Classes start August 22!


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