PSU Insight

Writing Your Business Plan

Choosing the Right Business Structure

Let’s tackle the business structure first. Are you (or will you be) a sole proprietorship, a ‘standard’ corporation, an ‘S’ corporation, a partnership, a Professional Association, a Limited Liability Company, or something else? (These are some of the most common business structures in the U.S.; other countries will have similar business structures, but they may differ in name or other characteristics.)

If you don’t choose a different structure — a corporation, a partnership, or something else — then you’re operating as a “sole proprietorship”. Without getting into all the legalities, a sole proprietorship is a business that is not incorporated and is owned by only one person. That is, it’s the “default” business structure. (Again, this is in the United States; it's quite possibly the same in other countries, but you should check with a legal professional to be sure.)

So the question is not what business structure do you want to have when you first start (you're a sole proprietor), but rather do you want to change it to something else? There are basically three reasons to choose a structure other than sole proprietorship — tax reasons, legal protection, and perception.

There can be tax advantages to being a corporation or an ‘S’ corporation, but these generally only occur when you start making real money. So when you’re first starting out, you may not need to incorporate to save on taxes. (However, only a tax professional can advise you on your specific situation. You should definitely consult with a financial professional before making any decisions of this type.)

Many businesses need the legal protection that a corporation offers. In case the corporation is sued, the company owner’s personal assets may be protected. But the likelihood of a professional speaker being sued is probably much lower than that of a surgeon, for example. So the protection of your personal assets is still an advantage, but is usually not a major concern. (A legal professional can be very helpful in determining if your personal liability needs to be reduced by incorporating your business.)

Third, the common perception of a corporation is that it’s more “legitimate” than a sole proprietorship. (This isn’t true, of course. But it is a common misconception.) Whether or not this perception is helpful to you may help you determine whether you should incorporate or not.

Here are a couple of “rule of thumb” guides to help you decide. First, if you are marketing keynotes, your prospects probably don’t care whether you’re a corporation or not. However, if you’re marketing training programs, then you may discover that you garner more respect if you’re a corporation than if you’re a sole proprietorship. (Corporations are sometimes perceived as being more professional.)

Also, if you’re marketing to associations, they’re generally quite comfortable with working with sole proprietorships. But companies (especially the purchasing departments of companies) may feel more comfortable working with corporations than with sole proprietorships. (It's just perception, but perception is important.)

So whether or not you should incorporate for “marketing” reasons depends on who your target market is and how much importance (if any) they attach to the idea of incorporation.

(In my particular case, I started as a sole proprietorship. But I was selling rather expensive training programs to companies, and I found that purchasing departments were leery of issuing purchase orders to individuals. So I incorporated, and all my prior difficulties vanished almost immediately. Companies are used to buying from other companies. But later, when I started selling to associations, I found the associations didn't care if I was incorporated or not; it was an unnecessary expense, so I folded the corporation and went back to being a sole proprietorship. But that may change as my circumstances change!)

WARNING — You should not use “Inc.” in your business name unless you incorporate. Calling yourself “My Business, Inc.” without actually incorporating may look more professional, but that’s considered fraud and will land you in a lot of trouble!

Defining your legal business structure is generally a simple task. What’s often more difficult is answering the question ‘why?’ Are you a sole proprietorship because that’s the best choice for you? Or are you a sole proprietorship because you don’t understand what an ‘S’ corporation is or what it can do for you?

A similar mistake is to incorporate “just because” everybody else is doing it, or it seems to be the ‘professional’ thing to do. There are advantages and disadvantages to each business structure, and you should consult with your legal and financial advisers to determine the structure that is best for you and your particular situation.