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6 Types of Business Structures, Part 2

Last week we began a three-part discussion on the pros and cons of the six types of business structures and their pros and cons. SBA.gov, our source, features additional information on each type of business structure, and you can read more by clicking on the structure heading below. This week we’re highlighting the pros and cons of Cooperatives and Corporations.

Cooperative


Pros


1. Taxation for members of a business structure can be reason enough for some to elect to use one structure over another. Members of cooperatives are only taxed once instead of being taxed individually and on a cooperative level.

2. Cooperatives may be eligible for a wide range of government-sponsored funding opportunities that may not be applicable to other business structures.

3. Cooperatives, being larger than some other business structures, may enjoy a lower cost of doing business through bulk pricing on supplies.

4. Some business structures do not allow for seamless changeover of members, but a cooperative does.  Members can join and leave with far more ease than with other structures.

5. Investors’ votes aren’t weighed by the amount of their investment.  This can make it easier to gain support of investors.

Cons


1. There are two sides to every coin--just as Pro #5 above may appeal to smaller investors, it might put larger investors off. One way to achieve balance here is by your determination of whether you think your business will benefit more from fewer large investors or many small investors.

2. Cooperatives work much the way their name suggests. Members must contribute together in order to achieve success. If this does not happen, the cooperative may suffer.

Corporation


Pros


1. The protection of shareholders’ individual assets, or limited liability, is one of the draws of a corporation. While LLCs offer similar protection, there are, of course, other defining characteristics that will make one a better fit for your business than the other.

2. A corporation can sell stock in the business to generate capital. This is one of the biggest pros of forming a corporation for many businesses.

3. Certain profits and income can be taxed at a corporate rate, which is typically lower than individual tax rates.

4. Corporations sometimes have more to offer potential employees by way of salary, benefits and stock options, and therefore may have more success drawing highly skilled employees.

Cons


1. Corporations require both more funds and work to start up.  If you’re a new business owner, you may want to think carefully before starting your new business as a corporation when you can incur lower startup costs as, for example, an LLC. You can always become a corporation later if doing so does not fit into your plans or budget at the start.

2. Adding to the expense of having a corporation as opposed to other business structures, double taxation may occur: first when profit is earned, and again when shareholders are paid.

3. Corporations require more time and effort to run and maintain as there is typically a larger amount of paperwork required to both start and keep a corporation running.

As you think about what structure your new business will have, remember that you can always change it later. You might have goals that fit one business structure, but your new business may not be there right from the beginning.  Of course, it’s a good idea to familiarize yourself with the process for changing business structures for existing businesses if you think this may be the right path for you.

Next week we’ll conclude our discussion on business structures by discussing Partnerships and S Corporations.