Starting a retail business comes with the need to make countless critical decisions ranging from picking the right suppliers to choosing a bank for the business bank account.
Another major decision that most business owners struggle with is choosing the right structure for their retail business.
There are 3 common types of business entities you can choose from:
- Sole Proprietorships – They’re the easiest to form and maintain, but provide limited scalability and no liability protection
- Corporations – Most complex to form, but best liability protection and scalability
- Limited Liability Companies (LLCs) – Fairly easy to form and maintain with liability protection, but you can’t issue shares.
So, which business entity is right for your retail business? Here’s some guidance.
1. Think About the Scalability of the Business Structure
When looking to set up your retail business, ask yourself if the business can scale. Can you expand it into a franchise or open multiple branches?
If the answer is yes, you need a business structure that can support this growth. And this can be either a Limited Liability Company or a Corporation.
Sure, you can open multiple branches for your retail business under a Sole Proprietorship. But a franchise will be out of your reach and liabilities will be too great.
2. Assess Your Ownership and Management Preferences
Are you willing to share ownership of the retail business? If not, you may want to set up a Sole Proprietorship. As a Sole Proprietor, you’re responsible for all the decision-making and running of the retail business.
Corporations are owned by shareholders. The portion owned by each shareholder depends on the percentage of shares they hold. Corporations are run by a board of directors and the shareholders can also vote on decisions like appointing a board member.
A Limited Liability Company is owned by its members. It offers some flexibility in management in that all members can run it, or just some of the members, or an outside member who has no ownership in the LLC.
3. Assess if Asset Protection is a Priority
How much of the business’s debts are you willing to shoulder?
As a Sole Proprietor, there’s no legal distinction between you and the business. Your personal assets can be used to pay the liabilities of the business.
Limited Liability Companies and Corporations offer liability protection, making them great for expansion. Creditors cannot go after owners’ personal assets unless they personally guaranteed the debt.
Each of these business structures—Corporations, LLCs, and Sole Proprietorships—comes with different strengths and weaknesses.
Use this infographic from GovDocFiling to learn more about these structures and gauge each against the needs of your retail business.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.