Choosing a Business Structure: a Matter of Risk Mgmt


Think of your business structure as an object that will take on its own identity. Your business structure should be the vehicle utilized to bring your business model to life. You'll need to determine your business model and align the outcome of that model with that business structure that most favors your strategy. If it involves a high level of control when it comes to managing day-to-day business operations, your best alternative would be to organize as a sole-proprietorship. If your strategy involves a mixture of control and risk management, maybe a partnership is the right organization for you. Of course, that’s given you have a partner to share the risks with.

As far as any other implications are concerned it’s unlikely that you be dissuaded from one type to the other as with your risk assessment. Cost-of-capital, for example, is the price you pay - or opportunity cost - involved with the level of risk you’re willing to take on. With less risks, your rewards are lower, partly because your cost-of-capital increases. There are organization costs to consider but they off-set the potential risks of personal losses and are the cost of mitigating those greater risks, such as when you organize as an LLC in order to limit your liability to your specific investment in that enterprise. Tax returns can be more costly as the business structure becomes more complicated but it's also usually a shared cost.

I like referring to the IRS and SBA websites for a summary of organization types which includes more information about the advantages and disadvantages.

IRS - Business Structures

SBA - Choose Your Business Structure


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