How to Choose the Right Business Structure

Becoming a successful entrepreneur in the retail industry means making sure you’re on the right track from day one. To take your ideas and your passion to the next level, you need to register as an official business — this starts with figuring out what business structure you’re going to opt for.

There are a number of options when setting up the structure of your business. To help you decide which is best for you and your new business, let’s look at a few of these options, as well as the advantages and disadvantages of each.

What's the best structure for your business? 

Sole proprietorship

When you register as a sole proprietorship, your business does not become a separate legal entity from you — technically rendering you self-employed. This benefits you in that your retail business’s profits become your personal income, and you only need to pay your self-employment taxes. A sole proprietorship also only takes a few steps to form, making it the easiest business structure to register as.

The main disadvantage of registering as a sole proprietorship is that it offers you no legal protection for your personal assets. You are directly liable to your creditors. If your business fails, lenders can come after to pay for outstanding debts.

If you are not comfortable with this risk, it might be worth exploring other structures that will protect your hard-earned income.

Partnership

If you plan on operating with other people, then a partnership is a possible option. Starting a retail business is an expensive venture, and a partnership can offer you the advantage of pooling capital. Aside from that, partners can each share their knowledge and expertise and delegate responsibilities.

The three partnership structures include: 

• General partnership: All parties share legal and financial liability equally. Partners a personally responsible for the debts the partnership takes on, and they split the profits equally (unless otherwise agreed).
• Limited partnership: This structure limits partners' personal liability and can accommodate bonus structures and other nuanced agreements.
• Limited liability partnership: This is a blend of general partnerships and limited liability partnerships. At least one partner must be a general partner, with full personal liability for the partnership's debts. At least one other is a silent partner whose liability is limited to the amount invested.

Limited Liability Company

If you’re looking for convenience and personal asset protection, then registering as a limited liability company is an attractive option for your retail business.

This structure is treated as a separate legal entity from you, protecting you and your assets from the business’ creditors. There are several benefits to setting up an LLC, such as having the option to avoid double taxation, keeping a flexible management structure, and having customizable ownership options. 

Do note, however, that LLCs are required to pay startup and annual fees — additional costs that sole proprietorships and general partnerships do not entail — so it's best to consider whether the advantages are worth the cost in the initial stages.

Corporation

Corporations, like LLCs, are established as separate legal entities. These structures are not owned by individuals; instead, shareholders establish ownership through shares of stock. The ownership of each individual shareholder does not depend on the initial invested capital either, and any shareholder can own a larger part of the business by buying more shares.

While corporations offer protection for their shareholders, there are some challenges to registering these structures. For one, it’s relatively difficult to set up a corporation compared to an LLC. Corporations are also taxed twice: first on the corporate level, and then all shareholders are taxed on an individual level. This puts a lot of financial pressure on the people involved in the business.

Which to choose?

Overall, there are several important details in setting up your retail business, such as thinking about your brand identity, advertising and marketing, and even the tools you’ll use to operate. It’s advantageous to choose a structure that fits your needs, and it is always wise to speak with a lawyer before forming your business.