Since the late 1970s, business owners have had access to the limited liability company business model, a hybrid that combines the best of both worlds: the sole proprietorship’s taxation benefits and your corporations’ liability coverage. Since then, this model has gained momentum — especially in the tech sphere, — (however sole proprietorships still rein as the most common and popular business structure).
But that’s not all.
Nowadays business owners have access to other business structures than just your typical C corp, sole proprietorship, partnership and, yes, even LLC. How about a B corporation? Or a for-profit/nonprofit business model? From not as many C corps taking the IPO route to LLCs viewed as a potential VC funding business model, there are several business structure trends business owners and entrepreneurs can take advantage of. Read on to learn what some of these are, plus find out why you need to conduct a Kentucky secretary of state business search.
1. Tech Companies Are More Open to Limited Liability Companies
Roughly a decade ago, you’d be hard pressed to come across tech companies with an LLC business model. As Mashable states, your stereotypical C corp was much more common. But that’s changed, most likely thanks to the LLC’s relatively easy setup and liability coverage benefits. But that’s not all; we have our estimates: The number of C corps to go public has decreased over the years. Most likely this is because the almost-guaranteed golden star social status and financial benefits corporations once received from going public aren’t the same anymore. LLCs — and non-IPO corporations — can make just as much as their IPO-corporate neighbors, while new IPOs can (and do) go belly up; think Snapchat’s IPO flop. (To be clear, LLCs cannot go public.)
That and venture capitalists can still fund LLCs so corporations are not the only way to go if you want to attract investors. Even if VCs don’t want to endure tricky tax measures and bypass LLCs in favor of corporations, companies can still get their much-needed investments via family and friend donations or loans, personal loans, and angel funding, to name a few.
2. Sole Proprietorships are Still a Popular Option
In 2013, roughly 70% of businesses in the US were sole proprietorships. In this case, nothing has changed. (As reported by SF Gate) five years later, the sole proprietorship business structure still stands as the most popular business model. The reason? Our guess is, thanks to easy and low-cost setup, a sole proprietorship is a great choice for new business owners still on shaky financial ground. Normally, businesses consider a transition to another structure, wanting to reap better tax benefits and liability coverage after hitting profit milestones — S corp owners, for instance, can use the 60/40 rule (60% of business revenue as salary and 40% distribution) to claim distributions tax free.
3. LLCs Can Receive Venture Capital Funding
As we mentioned, LLCs can (and have) received funding from venture capitalists. As Inc. states, limited liability company owners may assume going corporate is the only way to get VC funding, however, they can stand to lose as much as 30% in exit proceeds. Also, what (newly formed) C corporations gain in potential IPO status and more venture capitalists knocking on their door, they lose in double taxation. Instead of making this automatic assumption and feeling the VC pressure, consult with a reputable business professional to determine if that is the right move for you. (Keep in mind, some venture capitalists do choose to fund C corps over LLCs, stock options as one key reason.)
4. Social Entrepreneurs, Consider Other Business Models
Did you know there are more business models than your average sole proprietorship, LLC, and C corp? Yes, business owners — especially in the social nonprofit sphere — can choose a for-profit/nonprofit business structure. Like an LLC, a for-profit/nonprofit is the best of both worlds; as the name suggests, this structure combines nonprofit and commercial benefits. The business model can still use its nonprofit status to go tax free and receive grant money, while the for-profit status can bring in the revenue. Depending on the business, as Inc. states, a company may be more primarily for-profit or nonprofit, and then elect the other as secondary.
Ever Heard of a B Corporation?
Other than the for-profit/nonprofit business model, the B corporation probably is not the business entity you hear every day. As Harvard Business Review states, B corporations are a relatively new phenomenon, only being around for about a decade. So what is the difference between a B corp and your traditional C corp? As the article goes on to state, C corporations focus more on stakeholders while B corporations are zoom in on other people involved in the business such as employees, the environment, and community. Social entrepreneurs who want to make a profit while having a positive effect on the community may be a viable candidate for B Lab to review and give B corp status to (B Lab is a nonprofit that is in charge of reviewing and awarding B corp certifications to companies).
Final Thoughts: Choose the Business Structure That’s Right for You
From the old, standard, and still popular sole proprietorship to the recent addition, the B corp, business owners have many business models to choose from. Still, business structure trends may come and go, which is why, despite what the rest of the 30.2 million US small businesses are doing, small business owners need to choose the path that best aligns with their unique values and needs, and may benefit from a consultation with a reputable business professional. What business structure did you choose? Know of another business structure trend? Leave a comment.
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