How Your Business Structure Affects Your Ability to Scale

The first things that come to mind when starting a business are the attractive aspects: the name and tagline, the design of your store, and even the vibe of your brand. Rarely does one want to think about the less glamorous parts like choosing the structure you’ll register your business as. Ironically, this decision is one of the most critical parts of establishing your venture, according to AllBusiness — it will determine how you operate and ultimately, whether you’ll be able to someday scale your business.

Choose The Right Business Structure

If you are an aspiring entrepreneur with dreams of growing a successful brand, read on to find out which business structure suits you best.

1. Sole Proprietorship

For those starting, a sole proprietorship is the easiest type of business to set up. You just need to choose a name and location, file this with your locality, and pay applicable fees to get your business license. You’re also essentially opening a business as yourself, and therefore only have to pay taxes on your business income. This simplicity is probably a trade-off, though, because it’s also relatively hard to scale.

For one, setting up a sole proprietorship does not establish the business as a separate legal entity from you. Chron states that this means that your business’s liabilities become your liabilities, and your creditors can come after your assets to settle these. While it’s still possible to scale in the beginning, you’re going to need that extra layer of protection as you’ll go into a lot more financial and legal transactions that can jeopardize your hard-earned income.

2. Limited Liability Company (LLC)

A limited liability company (LLC) is a hybrid form of business that serves a lot of benefits. A ZenBusiness guide to starting an LLC points out how the process is relatively straightforward. You need only choose a registered agent, file your certificate of formation, and create an operating agreement before sorting out your tax requirements.

Moreover, compared to sole proprietorships, an LLC offers you personal asset protection as it establishes your business as a separate legal entity from you. An LLC is also relatively cheap to maintain as it is not double-taxed like corporations, and offers a lot of flexibility in management. However, this flexibility can be a double-edged sword. It can mean instability for investors, who may want a more secure company structure that gives them more power, such as a corporation.

3. Corporation

The word corporation sounds intimidating, that’s because it is. For those just starting, this is one of the more difficult business structures to set up due to the IRS’ long list of requirements and hefty tax costs. It’s also by default subjected to double taxation, so all members are taxed first on the corporate level and then through personal income from dividends.

However, setting up a corporation is viable for when you’re scaling up because you can get outside investors much more easily. Investopedia claims that a corporation issues ownership through selling shares of stock. This in itself is an established and stable system that makes it simple for the business to pool capital from investors, which is key in acquiring the necessary resources to scale the business.

small businesses in the US

Today, there are about 30 million small businesses in the US, but only the best few grow to be well-established brands. Whether you’d like to someday be known in your local neighborhood, your city, state, or the globe, our articles on ‘Business Improvements’ will help you do that. If you’re going to dream, might as well dream big, and making the correct business decisions from the beginning is the first step to a successful reality.