Business and management structures key issues

Katharine Fraser

If you’re considering starting a business or wonder if the structure of your existing business is the most advantageous, keep in mind the following: business structures have legal and tax implications.

There are a variety of business structures to consider when determining which structure would best suit your business:

n Sole proprietorship: A sole proprietorship is the most basic type of business to establish. You alone own the company and are responsible for all of its assets and liabilities.

n Partnership: A partnership is similar to a sole proprietorship except more than one person is involved.  Typically, two or more people come together to work at a given business and share in the profits or losses of that business. Like a sole proprietorship, a partnership is relatively easy to set up and doesn’t have to pay the sort of taxes larger corporations do. Income from partnerships flows through to the partners and they’re responsible to pay taxes at the personal level. The partners also are responsible for business losses and liabilities. 

n C Corporation: A corporation is a company controlled by an individual or group of people who own shares in the company. The shareholders dictate who runs the company and how it conducts business and then receive profits based on the shares of stock they own. Shareholders exist separately from the people working for them, which means the owners need not worry about personal liability.  The company continues even after the founders have retired. Corporations are taxed at the entity level. If dividends are paid to shareholders, however, there’s double taxation at the entity level as well as at the shareholder level.

n S Corporation: S Corporations are slightly different versions of standard corporations. Unlike other corporations, they pass all profits, losses and tax deductions to their shareholders rather than absorbing them as entities. The earnings or losses are passed through to shareholders, who report them on their personal tax returns rather than reflecting them through the company.

n Limited liability company: LLCs combine the elements of a corporation with those of a partnership or solely owned business. Like corporations, owners aren’t typically personally responsible for debts and other liabilities. Owners could be liable for debts they guarantee, but also could be protected from “personal liabilities” of the LLC. Laws vary from state to state. Like partnerships and sole proprietorships, LLCs are comparatively simple and allow for quick establishment.

Once your business structure is set, it’s important to determine what management structure best fits your company. 

Do you need a chief executive officer, chief financial officer or chief operating officer? The roles and responsibilities of upper management direct the talent and resources within a company to advance business goals and include oversight, forecasting and planning. Executives aren’t involved in the day-to-day operations of the company at a detailed level.

Upper management assists with growth, making sure appropriate policies and procedures are in place and being followed. They focus on the big picture to help the company run as efficiently and effectively as possible.  These positions also can be outsourced to qualified firms that have the capability and resources to provide these services at a high level.  This allows companies to have the knowledge and experience of upper management without having to take on a full-time employee, particularly when these types of services are required only on a limited basis.

Determining whether or not to outsource certain positions or functions of a company is mostly considered from a cost-benefit perspective.

The benefits of hiring a qualified firm to perform the functions of an upper management position include having a large amount of experience, resources, knowledge and competency without having to put up a large investment in hiring one individual. This also provides a company to structure the use of the firm to fit its needs. 

Most small businesses might not need a full-time high-level position. Having the comfort of a CFO on a limited basis can provide additional assurance the business is operating at its highest potential and creating the most opportunity for success.

The most common outsourced functions are bookkeeping, payroll and information technology. This doesn’t mean, though, upper management positions shouldn’t also be considered for outsourcing. This can provide an excellent source of business management without the additional cost of hiring a full-time employee.

If you have questions or concerns about what business and management structure is right for your company, consult a business professional to discuss your options to find the best fit.