What Should Minnesota Entrepreneurs Consider When Choosing A Business Structure?

There is a wide range of different business structures available to Minnesota entrepreneurs looking to start their own businesses. Each different structure offers its own advantages and disadvantages. So, how can you decide which structure is right for your business?

The answer is that you start by asking the right questions:

•      Is personal asset protection important to you?
•      Is simplicity more important than perks?
•      Which tax structure will be most beneficial?
•      Are you going to have investors or pursue financing?
•      Are you planning to take your company public? If so, how soon or how far into the future?

The answers to these five questions will go a long way toward guiding you in the right direction. The other important step is to make sure you bring these questions to the right people.

Personal Asset Protection

One of the most important decisions you will make when forming your business is whether you will create it as a legal and financial entity that is separate from you.

Business structures such as sole proprietorships and general partnerships leave their owners and their owners’ assets vulnerable to any legal or financial liabilities. Other structures, such as limited liability companies (LLCs) and corporations, can provide a shield between the business and personal liability.

Simplicity Versus Perks

The sole proprietorship is the simplest of all business structures, and you may consider the protections from personal liability that LLCs and corporations offer to be perks. However, there are other layers to this question.

LLCs, for instance, are often simpler than corporations. They require less paperwork and compliance. They allow for simpler taxation. But corporations can pay dividends. They can offer tax advantages to businesses that reinvest a portion of their profits into the business. And they can offer a host of other perks, ranging from such things as medical expenses to investment in education.

Beneficial Tax Structures

No one wants to pay more taxes than they have to or make their taxes any more complicated than is necessary. Even so, while your choice of business structure will have a profound impact on your taxes, you’ll want to consider more than just whether you pay your taxes directly, have the company pay, or have the company and shareholders pay.

Your choice of tax structure should factor in your current income level, as well as your expected business profits. It is often a wise move to review the choice with a business CPA who can explore the projected results.

Investors And Financing

Many banks and other investors are happier to invest in LLCs, corporations and other businesses that stand apart from their owners. As a result, if you’re hoping to woo these investors, you may want to form your business in a way that it will appear more attractive to them.

Taking The Business Public

You can only take your business public and sell stocks if you set it up as a corporation. However, if you will need to nurture and grow your business for a significant duration before you can take it public, you might form it, initially, as a different structure, such as an LLC. You can later convert it to a corporation when you get closer to going public.

Bring Your Questions To The Right People

The structure you choose when you form your business will affect it for years to follow. Choosing the right structure can greatly reduce the risks you, and every business, face in an uncertain market.

Accordingly, it’s critical that you do more than ask the right questions. You want to make sure you take your questions to the right people. Unless you’re looking at a very simple business concept – and you are confident that you have all the information you need about funding, compliance and everything else – you could probably benefit from the insight offered by a few different professionals:

•      Business attorney to address the legal options and ramifications
•      CPA to address the tax and financial considerations
•      Commercial banker to address initial and future financing

When you’re forming your business, you don’t want to rush in half-baked or blind. A good number of small businesses fail early on. In business, ignorance isn’t bliss, ignorance is a risk. By taking the time to ensure your business has a solid foundation, you go a long way toward protecting it from future risks. And that means more chances to grow and prosper.