Choosing a business model can be a headache, even for the experienced entrepreneur. Tax laws, liability, decision-making … every model has its own rules, and even small differences can add up to big shifts in strategy.  If you’re planning a new venture and want to pick the best business model for your company, here are several handy questions to ask yourself.

  1. How many people are in the company?

If you have multiple employees or partners in your venture, you’ll probably have to go with one of the more complicated business models that allows for employees. However, if it’s just you and no one else, the simpler models are open, such as the popular sole proprietorship.

This option makes it easier to set up a simple business in your state quickly and not have to mess with too many legal issues. It also makes taxes much, much easier when accounting begins.

  1. What relationship do I have to other members?

If your company does have other members, you need to ascertain the nature of your relationship with them. There are multiple forms of partnerships, for example, from general to limited liability, that can involve a wide range of partnership relations and divisions in profits, based on how involved the partners are and how much financial backing they provide.

If, on the other hand, your clients and investors want a typical shareholder relationship, you may want to consider a corporation.

  1. Is my line of work legally complicated?

If legal problems or tangles are common in your line of work, it may be easier for clients to sue you. In this case, a Limited Liability Corporation (LLC) may be the best bet for your business.

The LLC model is one of the most flexible options available to you, and is suitable for a single entrepreneur or a group of workers, depending on the set-up. Even major companies may prefer the LLC format for its simplicity.

However, no matter what size the company is, the LLC protects employees from liability, and placed legal burdens on the company itself instead.

  1. How much money will I make?

This may seem like a strange question, but it has its place. If you want to choose a corporation because of the prestige and the easier access to investors, you need to be prepared for the downsides.

Corporations act as their own entities, which means they need to pay taxes just like you. This double taxation can diminish your profits significantly; and it creates a whole lot of paperwork, too. Generally speaking, a corporation is not worthwhile when you’re first starting a business, unless you can count on plenty of revenue with that particular model.

S-Corps are a hybrid model that can avoid double taxation, but come with extra limitations as well.

  1. What industry do I work in, and does it have a preferred model?

If you’re feeling a little stuck, take a look at your industry and the models other companies prefer to use. This has a couple of advantages. Primarily, it can make it easy to spot important but niche models.

For example, clinics and law firms often use the professional corporation model, because it allows them to interact successfully with the larger network of professionals bound by the same laws and certifications.

  1. What are my long-term plans?

If you eventually want to go public, it may be wise to start with a simpler partnership or LLC and change to a corporation in time. If you want to grow swiftly, an LLC or C-corp may be wiser than the limited S-corp. If you want to sell as soon as possible, a corporation or LLC may be more attractive to buyers than a sole proprietorship.

  1. What state do I operate in, and what specific rules does it have?

States may treat certain models, like LLCs, differently. Study the regulations in your state before making a final decision. Consult specialists to help you make your decision before assuming any binding legal status.

By Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com.

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