When starting an accounting firm, one of the most important decisions you will make is what business structure to choose. This decision will significantly impact your taxes, liability, and ability to raise money.
There are several different types of business structures to choose from, so how do you know which is right for you? This article will discuss the pros and cons of each type of business structure and help you decide which is best for your accounting firm.
What is a Business Structure?
A business structure is the legal way that a business is organized. The business structure you choose will have major implications for your business. I
It will affect everything, from how you are taxed to your personal liability if something goes wrong. This is why choosing the proper business structure for your accounting firm is important.
The most common types of business structures in the United States are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations:
Sole Proprietorship
A sole proprietorship is the simplest type of business structure. It is owned and operated by one person with no formal legal structure.
Pros:
- Easy to set up and operate
- No need to file paperwork with the state
- You have complete control over your business decisions
Cons:
- You are personally liable for all debts and liabilities of the business
- Raising money can be difficult as you can only sell equity in your own personal assets
Partnership
A partnership is a business structure owned by two or more people. Partnerships can be either general partnerships or limited partnerships.
Pros:
- Easy to set up and operate
- You are not personally liable for debts and liabilities of the business
- Raising money is more accessible than a sole proprietorship as you can sell equity in the business
Cons:
- You have less control over business decisions than a sole proprietor
- General partners are personally liable for all debts and liabilities of the business
Limited Liability Company (LLC)
An LLC is a hybrid between a corporation and a partnership. It offers a corporation limited liability protection with a partnership’s flexibility.
Pros:
- You are not personally liable for debts and liabilities of the business
- Raising money is easier than a sole proprietorship as you can sell equity in the business
- LLCs offer more flexibility in management and ownership than corporations
Cons:
- LLCs can be more expensive to set up and operate than sole proprietorships or partnerships
Corporation
A corporation is a legal entity that is separate from its owners. Corporations can be either for-profit or nonprofit.
Pros:
- Limited liability protection for shareholders
- Easier to raise money by selling shares of stock
- Can have an unlimited number of shareholders
Cons:
- More expensive and complicated to set up and operate than sole proprietorships or partnerships
- Shareholders have less control over business decisions than owners of other business structures.
What Factors Should You Consider When Choosing a Business Structure?
There are a few factors you should consider when choosing a business structure:
Liability:
How much personal liability are you willing to take on? If you are not comfortable with the idea of being personally liable for business debts, then you will want to choose a business structure that offers limited liability protection.
Taxes:
How do you want your business to be taxed? Different business structures are taxed in different ways. For example, sole proprietorships and partnerships are typically taxed as pass-through entities, meaning that the owners pay taxes on their share of profits through their personal income tax return. Corporations, on the other hand, are taxed separately from their owners.
Management:
How do you want your business to be managed? If you want to have complete control over business decisions, then a sole proprietorship or partnership might be the best structure for you. On the other hand, if you are comfortable sharing control with others, then an LLC or corporation might be a better fit.
Raising Money:
Do you need to raise money from investors? If so, then you will need to choose a business structure that allows you to sell equity in your company. Corporations and LLCs are typically the best structures for raising money from investors.
Do Business Structures Affect Insurance?
The business structure you choose can affect your insurance needs. For example, suppose you are a sole proprietor or partner. In that case, you will need to carry personal liability insurance to protect yourself from being held personally responsible for business debts and liabilities.
If you choose to form an LLC or corporation, you will not need personal liability insurance as the business will be legally separate from its owners. However, with a corporation or similar, you will still be required to obtain certain types of insurance for your accounting firm. Luckily, you can get your insurance now online in just a few clicks. Though purchasing business insurance online is a quick process, we recommend looking at different policies and building an insurance plan tailored to your company.
Make Sure You Consider the Future Needs of Your Accounting Firm
When choosing a business structure, it is important to consider the future needs of your accounting firm. For example, if you think you might want to sell equity in your business down the road, then you will need to choose a business structure that allows for this.
You should also consider whether you might want to expand your business or add additional locations in the future. If so, then you will need to choose a business structure that will allow for this growth.
Which Business Structure is Best for an Accounting Firm?
The best business structure for an accounting firm will depend on the business’s specific needs. For example, an LLC or corporation might be the best option if you are looking for limited liability protection. On the other hand, if you want to have complete control over business decisions, then a sole proprietorship or partnership might be a better fit.
Which Business Structure is Best?
Ultimately, there is no one-size-fits-all approach to choosing the proper business structure. No matter which business structure you choose, consider all your options and select the one that is best for your accounting firm.
Remember that the choice you make will have significant implications down the road.