Business structuring, whether it be a specific type of incorporation, adherence to a financial model or both, has significant effects on business' present and future financial standing, credibility and capacity. This makes structural decisions an important factor in the steering of businesses toward their intended functions and purpose.

1. Moneycation
Published by Moneycation™
Newsletter: November 11, 2014
Volume 2, Issue 12
Financial advantages of business structures
Businesses are shaped by their legal form and capital
structure. Business structuring, whether it be a specific type of incorporation, adherence to a
financial model or both, has significant effects on business' present and future financial standing,
credibility and capacity. This makes structural decisions an important factor in the steering of
businesses toward their intended functions and purpose.
Even though business structure shapes business operations and functionality, legal classifications
only partially determine how businesses manage their finances. This is because financial decisions
are also influenced by factors such as treasury management solutions, financial systems
architecture and internal policies. Nevertheless, business structure is often a core component and
key factor in the effectiveness of business financial management and operational efficiency
Why is business structure important?
Just as companies differ, so do the rules that regulate them. To use the analogy of sports, just as the
rules of baseball are designed specifically for the nature of the game, so are the rules and
regulations of football. To illustrate, it would make as much sense to require a sole proprietorship
to file a mountain of paperwork as it would for a baseball player to wear shoulder pads. Some
things are simply not required or necessary, whereas other times they are. Allowing different forms
of business to operate within specific legal frameworks facilitates the interests of the owners in
addition to commercial and economic development. Some of the reasons why business structure is
important are listed below:
• Business purpose
• Managerial style
• Financial objectives
• Size of business
• Operational costs
• Legal risks
Before going in to business, or if and when a business changes in one way or another, a specific
business structure may be worthwhile. For example, if a sole proprietorship increases revenue and
its clients base to a size that requires employees, then incorporation as an S Corporation or Limited

2. Liability Corporation are two options that accommodate some of the changes faced by a growing
sole proprietorship.
In any case, it is wise for business owners to be familiar with and consider various forms of
business before formation and in terms of business strategy. Doing so helps protect business
interests and assets in addition to optimizing areas of business financial management such as tax
strategy and capital investment. Business structure also affects a business' involvement with third
parties as evident in the following diagram.
Business structure influences stakeholder composition
Image source: Grochim, CC BY-SA 3.0
Types of business structures
Since the 1970s, several new types of business structures emerged to meet specific commercial and
investor needs and preferences. These different forms of business allow for a certain amount of
legal customization that affects how a business is managed, official documentation, access to
capital and taxation.
To illustrate, the financial objectives and needs of a business run by a single person out of a home
office are likely to be quite different from those of a large publicly traded company that earns
billions of dollars in revenue each year. In essence, the different legal forms of business cater to
those differences for the purpose of assisting business owners and facilitating commercial and
economic development more purposefully and productively. The following table compares the
variances among multiple types of business structure.

3. Company Structure Comparison Table
Share
structure
Tax benefits Pros Cons Risks
B-Corporations Unlimited
shareholders
No unique tax
benefits
Wider access to
capital ex.
PRIs*
• Certification
procedures
• Random audits
• Reduced profit
margin
• Social costs
L3Cs No stock
issued
Pass through to
personal income
tax
• For profit and
charitable
capital access
• Less filings
• Not available in
all states
• Not tax exempt
Off-putting to equity
investors
LLCs Unlimited
shareholders
Individual
income tax rate
or association
• Owner
liability
protection
• Informal
operations
• Flexible loss
distribution
• Less filings
• PRI access
• Member
distributions
taxable regardless
of receipt
• Self-employment
tax may apply
• No member
wages
• Reduced tax
protection
• Non-comprehensive
liability protection
LLPs Two or more
partners
No double
taxation
Owner liability
protection
• Professional
services only
• No 100% liability
protection
• Negligence
protection only in
some states
• Differing state
regulations
LPs One general
partner plus
limited partner
investors
Personal income
tax deductions
may lower
taxable LP
income
• General
partner may be
an LLC
• Limited
partners are
protected from
liability
• High cost
• General partner
Liability insurance
• Less investor
control
• Reduced access to
capital
Sole
Proprietorships
Single owner Personal income
tax deductions
No registration
required
•High owner risk
• No shareholders
• Possible unlimited
liability
• Market risk
Partnerships Two or more
owners
Business
income taxed at
individual rate.
Exception:
publicly traded
partnerships
• No
registration
required
• Lower filing
requirements
Restricted access to
equity financing
• Exposure to liability
• Insurance costs
S-Corporations 75 or fewer
shareholders
Pass through
income tax
• Owner asset
protection
•Even loss
distribution
• More regulation
• Required
distributions
• IRS intervention
• Employer costs
C-Corporations Unlimited
shareholders
Corporate tax
rate
• Lower tax
brackets
• Wide access
to capital
investment
• Owner asset
protection
• High cost
• Many filing
requirements
• Market risk
• Operational costs
• Potential cyclical or
seasonal downtime
• Double taxation

4. Share
structure
Tax benefits Pros Cons Risks
Not-for-profit No
shareholders
• No federal tax
• Tax free
donations
Charitable and
grant financing
• No capital gains
• Extensive
documentation
Limited revenue
leveraging and
utilization
Cooperative Member-owners
Share
investments are
tax free
• Low capital
cost
• Socially
responsible
Not profit focused • Low capital
investment
• Slow development
Joint ventures Membership
via contract
No business tax • Simple to
establish
• Flexible
management
• Fiduciary
accountability
• High liability
• Short term business
contract
• Managerial
complications
* PRI=Program Related Investment
Some states also offer other business structures per SPCwa. Moreover, in Washington State, a
business structure known as a special purpose corporation allows owners to take on a certain
amount of social responsibility not connected with S Corporation or C Corporations. In California,
a business structure known as flexible corporations were legislated for a similar purpose. Another
type of business structure is called a master limited partnership and has specific dividend and tax
benefits that appeal to some investors per Forbes.
A unique form of corporate structure not available to most pertains to tribal corporations.
Moreover, since tribes have a unique sovereign status under the U.S. Constitution, they are able to
operate with tax exempt status. The Tribal Business Structure Handbook specifies the diversity
afforded to tribal corporations as follows:
“The U.S. Constitution acknowledges the sovereign status of Indian tribes in the Treaty
Clause, in the 14th Amendment as "Indians not taxed," and in the Commerce Clause...A tribe,
because it is a sovereign nation, can form a governmental entity to perform business
functions. This entity can be an instrument of tribal government, a political subdivision of
the tribe, or an agency or division of the tribe. A tribe can also form a separate business
entity formed under federal, tribal, or state law.”
Still more company structures such as those used for business development companies, are
designed specifically for investing. Furthermore, commercial legal structures include close
corporations and special purpose entities aka bankruptcy-remote entities. Each of these latter forms
make specific legal accommodations and/or diversity in accounting possible. A closer look at
special purpose entities illustrates the extent to which business legal structure influences corporate
finances.
Special purpose entities
Special Purpose Entities (SPEs) are unique legal vehicles such as trusts that can be owned as
subsidiary companies, yet stand apart from more common and traditional business structures. This
is because they provide unique financial benefits to companies seeking to enhance their financial
management. To illustrate, SPEs facilitate 'asset securitization', a form of borrowing against
reorganized assets that can lower the cost of capital. Moreover, although more difficult with

5. increased regulation, SPEs allow for off-balance sheet debt that is an advantage to organizations
due to 'cleaner' appearing financial statements. This is in addition to the protection of assets that
would otherwise be exposed to legal claims per Robbins, Salman & Patt, Ltd. Special purpose
entities also allow alternative options for depreciating assets according to the CPA Journal.
SPEs have come under increased scrutiny due to abuse of these financial mechanisms in the past. A
corporation named Enron created a financial scandal large enough to spur more focused accounting
rules because SPEs were the mechanism used to manipulate accounting data and deceive investors.
However, in the CPA Journal, Jalal Soroosh Phd and Jack T. Ciesielski CPA state these regulations
are insufficient to stem problems associated with misleading shareholders. For example, in the
past, by not owning 50 percent or more of an SPE, but maintaining control of it, corporations
avoided consolidating SPE financials such as debt into their own balance sheet.
It is important to note the date of accounting commentary such as that in the CPA Journal as it can
predate ensuing accounting regulation of SPEs. The Financial Accounting Standards Board
(FASB) continually establishes official accounting standards that companies must follow when
preparing financial statements; this includes the aforementioned rules pertaining to special purpose
entities. Furthermore, official accounting rulings such as FASB Statements 166 and 167 eliminated
'qualifying special purposes entities' and increased corporate disclosure requirements for
organizations utilizing SPEs.
Federal Accounting Standards Board regulation of SPEs does not eliminate their use however.
Moreover, although the size of loans assumed by special purpose entities must be accounted for
under newer FASB rules, loan transactions via SPEs can still qualify for off-balance sheet
documentation according to BDK, LLP. Jon McDowell of BDK, LLP describes this 'loan
participation' as involving proportionate ownership and full exchange of assets between interest
holders that can in cases excluding 'sales' of loans qualify for off-balance sheet recording.
Despite the continued existence of SPEs, The Basel Banking Committee reaffirms the added affect
FASB rulings 166 and 167 have on SPEs. Specifically, the committee states the changes made in
2010 “significantly reduce the ability of certain transactions to qualify for off-balance sheet
treatment.” In any case, when investing knowing if a company makes use of SPEs, which set of
accounting rules a corporation is subject to i.e. International Financial Reporting Standards (IFRS)
or Generally Accepted Accounting Principles (GAAP), and closely examining corporate
disclosures can all assist in being better aware of that businesses' financial activities.
Financial objectives
The financial objectives of business founders and investors have a strong influence on the type of
monetary benefits involvement with a company offers. These financial goals are often considered
ahead of time before choosing which type of business structure is ideal. The following financial
advantages differ in availability and probability based on business structure. For instance, a C
Corporation is more likely to make capital gains and fixed income possible whereas an S
Corporation's owners are positioned to receive dividends.
• Dividend income
• Capital gains

6. • Stakeholder benefits
• Salary income
• Fixed income
In some cases, business participants may not have profit margin expansion as their primary
objective. If they are also concerned about establishing an income within a tax free business, then a
non-profit is more suitable. Moreover, although this structure of business does not allow for capital
gains, it does allow stakeholders an opportunity to earn from their involvement with the business.
Corporate social responsibility vs. financial benefits
The form of a company also influences financial outcomes, and in some cases trades financial
value for social returns. This is particularly the case with benefit corporations or B Corporations.
According to Eric Friedenwald-Fishman of the Metropolitan Group, this type of business structure
offers shareholders a fair return while simultaneously adding societal value via environmental,
social and economic accountability.
“Our basic structure for corporations is myopic; it focuses on maximizing profits to
shareholders. Whether we are protesting the power and greed of corporations or defending
them as drivers of the economy, we share the same basic expectation that a corporation’s job
is to maximize profits to shareholders. This basic expectation is damaging to people,
communities, the economy, and ultimately to the companies themselves.”
To date, 26 states and the District of Columbia have legalized B Corporation structuring per B Lab.
The recency of this type of business legislation and the relatively quick adoption of it reflects a
growing awareness of a cultural shift to more sustainable economics. B Corporations provide an
alternative choice that assists the objective of corporate social responsibility in a number of legal
ways that transcend the limitations of business policies. For example, the Economist magazine
states B Corporation qualification legally binds employers to take a fiduciary responsibility for
workers. This is a more solid engagement with CSR than mission statements that serve more as
ideals than actual practice. However, Dana Brakman Reiser of the Wake Forest Law Review states
B Corporations have much to be desired in terms of full fledged social accountability.
“The benefit corporation will not yet achieve all of the goals social enterprises desire from a
hybrid form. Benefit corporation statutes have opened up a place for social enterprises to
legally articulate their dual mission, and have guarded the ultimate exit from the hybrid form
with significant shareholder voting requirements. Leaving all content to unregulated
standard-setters and providing little guidance or enforcement apparatus for midstream
decision making, however, does not do enough to ensure benefit corporations can enforce a
dual mission over time.”
While B Corporations and LC3s do offer some edge to CSR focused businesses in terms of access
to capital investment. S Corporations and C Corporations still have an advantage from the single-minded
pursuit of profit regardless of potential social cost. In other words, not having the burden
of CSR provides an opportunity to increase return on investment via purely profit motivated
project management and business operations.

7. Tax implications
Business structure is an aspect of commercial tax strategy that has implications for as long as a
company operates. For example, a C Corporation will have to pay the corporate tax rate, while a
503(C) will not. In other words, business stakeholders receive an income rather than profit while
also serving the public. Moreover, while the business is not taxable, the income received by
stakeholders is.
Factors such as the location of a businesses' headquarters also impact taxes as two companies with
the same structure, but different locations are sometimes subject to different tax law. For example,
states that are more business friendly are likely to have financial incentives for specific types of
business incorporation. Below are some of the tax influences that vary between business structures
and determine total tax costs.
• Tax reducing instruments
• Tax rate
• Taxable income
• Tax accounting
• Tax jurisdiction
Research published by the Wharton School of Business at the University of Pennsylvania shows
that the pre-tax cost of debt, interest rates and corporate size impact how businesses use debt and
the form of debt used to finance company operations and projects. Moreover, the following factors
affect business' financial structure, but not necessarily the amount of debt taken on by a
corporation.
• Interest rate environment
• Pre-tax cost of debt
• Size of corporation
• Marginal tax rate
• Demand for financing
The results of the research are further explained in the excerpt below:
“A tax effect exists in the firm sensitivity to the pre-tax cost of public debt: specifically, high
marginal tax-rate firms are less sensitive to changes in the pre-tax cost of public debt than
low marginal tax-rate firms. This difference in sensitivity implies that the extent to which tax
effects manifest in observed issuances depends on the current interest rate environment.”
Depending on which state a business is incorporated in and operates out of, incorporation as as an
S Corporation or C Corporation may be worthwhile. This is because states such as Wyoming,
Nevada and South Dakota do not have a corporate tax per the Tax Foundation. Furthermore, the
map below shows which states have the best tax environment to do business in, and is based on
more than 100 variables such as unemployment insurance tax and sales tax.

8. Source: Illinois Policy; license: Fair use
State laws and economic environments
Tax policy alone is not the sole reason to choose a particular type of business structure. Other
factors such as state liability laws, licensing or permit requirements and minimum wage laws also
impact business costs and operations. According to Legal Zoom, state business funding programs,
right-to-work laws and managerial flexibility also influence the ease and benefits of doing business
in particular states. For example, Delaware case law sometimes helps establish a favorable legal
climate for limited liability corporations. The American Bar Association describes one such aspect
of case law in reference to a state supreme court ruling titled Nemec v. Shrader, 991 A.2d 1120
(Del. 2010).
“In light of the Delaware Supreme Court's decision...under Delaware law, the implied
covenant is, at best, a weak tool for plaintiffs. It cannot be used as an amorphous or free-floating
duty detached from the contract itself. It cannot be used paternalistically to rewrite
provisions that, in hindsight, advantage one party over the other. It cannot be used to
prohibit acts that are expressly permitted by the parties' bargained for agreement.”

9. In other words, the law places a great deal of emphasis on contractual agreement rather than case
law rulings that give plaintiffs or accusers wiggle room or flexibility in interpreting the meaning of
contracts beyond what they specifically state. Thus, before incorporating any type of business
structure, a look at the case law and legal climate surrounding each particular type of business may
prove beneficial as an act of insurance or pre-emptive legal protection. Things to look for in state
corporate law include the following:
• Incorporation costs
• Business filing fees
• Case law and legal precedent
• Commercial code
• Excise, sales and corporate tax
States that are taking a proactive approach to business are redesigning government to foster
economic development per a report published by the U.S. Chamber of Commerce and the National
Chamber Foundation. Furthermore, by adjusting the ways and means by which businesses and
their structures are created and designed, state governments are in effect providing potential
financial opportunity or benefits for those businesses.
“Enterprising states are making the hard choices today by trimming costs and prioritizing
investments that establish the conditions for business creation and expansion. Enterprising
states are getting ready for the hard work ahead in a globally competitive economy by
modernizing government and focusing on creating and sustaining high-growth, higher-wage,
21st century industries.”
Businesses that are able to take advantage of favorable state economic conditions in states that also
have business friendly laws, taxes and fees may also find such locations quite good for formation
of an S Corporation or C Corporation. To illustrate, the aforementioned government study ranks
Alaska, North Dakota, Wyoming, Maryland and Virginia as being better than other states for
commerce due to reasons that potentially benefit business revenue, commercial opportunity and
economic growth.
The factors considered as being commercially positive in the report include high job growth, GDP
growth, industry development and productivity growth. Moreover, since Wyoming is ranked the
third best place for business per the study and also has not corporate tax, a C Corporation that
operates out of this state may garner substantial financial advantage from doing so, especially if
location is not an obstacle to carrying out business services.
Financial instruments
Business structure influences financing decisions and options. It is for this reason that mid to long-term
strategic objectives are a key variable in deciding which form of incorporation, if any, is most
appropriate for a business and its owners. Numerous methods of financing are available to
businesses provided they have demonstrated revenue, income and solvency among other important
financial considerations. A few of the financing options that business may choose are as follows:

10. • Program related investments
• Convertible bonds
• Accounts receivable factoring
• FLY Paper
• Private equity
• Revolving credit
• Owner capital
• Commercial loans
• Business development grants
Some financial instruments are better suited to specific business structures than others. This is
because financial management decisions have a number of effects on matters such as cash flow,
project leverage and corporate expansions opportunities. To illustrate, a C Corporation that is
publicly listed has greater access to public equity investment and therefore a higher probability of
facilitating revenue growth via this form of financing.
On the other hand, a private S Corporation with the objective of raising profit margin without
growing capitalization or increasing the number of business shareholders will be more likely to
consider alternative financial instruments. Whichever decision financial managers make will
influence several additional factors relevant to business performance, some of which are listed
below:
• Cost of debt
• Credit rating
• Corporate financials
• Financing options
• Tax benefits
Traditionally, some forms of financing cost more than others. For instance, equity is believed to be
more expensive than some loans due to investor expectations. However, equity does not appear on
balance sheets as a liability and therefore has an accounting advantage over debt. This helps
improve financial ratios having to do with debt as a percentage of assets. Moreover, a high asset-to-
debt ratio also helps improve credibility and lower the cost of debt.
Not-for-profit and benefit corporations are more likely to have access to government funding
designed to assist social development. For a B Corporation that manages its finances right, having
access to low-cost program related investments in addition to commercial financing has the
potential to negate extra costs incurred from promoting corporate social responsibility. In a sense,
the dual purpose of B Corporations affords financial advantages and disadvantages that seek to
create a net societal benefit overall.
Financial modeling and structure
Numerous financial models exist that attempt to measure the value of specific capital
arrangements, cash flow scenarios and financing activities of a business. According to Hayne
Leland of the University of California at Berkeley, these include a form of financial analysis named
after its developers called Modigliani-Miller, another called tradeoff theory, a third known as the

11. Black , Scholes and Merten model and another labeled The Merten, Black and Cox models. In the
same order, these are traditional academic financial models that seek to determine worth of capital
structure, value capital structure in terms of debt risk, define asset value in relation to future cash
flows and evaluate capital structure with risk neutral calculations.
As with many quasi-scientific models used in the social sciences, financial models have limitations
that restrict their evaluative and predictive ability. For example, the Black, Scholes and Merten
model assumes a risk free rate of return in its valuation of a business' securities. In many cases, the
risk free rate of return is not typical, and therefore this model becomes somewhat flawed in it's
ability to accurately quantify the actual worth of financial instruments. Hayne personally describes
the problem with structural models used in financial management:
“Underprediction of credit spreads and default probabilities for low risk debt and shorter
horizons...makes doubtful the wisdom of using current structural models for
recommendations about optimal capital structure.”
Traditional financial models have their place, and are useful in optimizing large scale asset
allocations and valuations in a conservative manner. Furthermore, they do so with relatively fixed
variables such as constant rate of return, predictable future cash flow and continuity of historical
statistical data pertaining to factors including credit costs and financing risk. For businesses that do
not have the luxury of statistically valid cash flow forecasts, a flexible form of capital structure
may be more suitable. This can be something as simple as a business credit card to bridge gaps
between cash outflow and inflow. It could also be more elaborate and involve the underwriting of
debt securities using an investment bank.
Commercial financial structure really depends on the scope, size and purpose of a business and its
use of financial transactions in determining asset, project or contractual worth. In any case, project
financing, capital structuring, debt optimization and asset allocation are decisions that involve
variables unique to each business operation. For example, a construction firm may benefit from
forward contracts on concrete whereas a retail flower distributor may benefit from cash basis
accounting using multiple product sources in order to achieve lower operational costs. Determining
the cost and value of decisions such as these is an ongoing endeavor that financial managers
ideally customize on a per transaction or contract basis and in accordance with overall business
financial strategy such as a benchmark return on investment of X percent.
Conclusion
Key considerations to take in to account prior to establishing a business structure include the future
revenue and financing requirements of a business. Since some companies are more complex than
others, especially when they increase in size, the likelihood of needing capital investment, more
employees and liability coverage increases. This makes companies poised for dynamic commercial
type of growth more suited for an LLC, S Corporation or C Corporation structure depending on
how large the business is likely to become and the nature of the business itself. For example, an
information technology startup with a proprietary patent and sophisticated equipment is more
likely to require a higher amount of capital investment or financing than an accounting services
business.

12. In some cases, liability insurance may be used alongside an LLC structure or in lieu of an LLC in
order to benefit from a different incorporation while still retaining liability protections. According
to the U.S. Small Business Administration, several forms of liability insurance exist that provide
protection against commercial general liability, professional liability, product liability, employment
practices liability and environmental liability. In any case, a close examination of business goals,
forecasts, assets and market in addition to state and federal regulations is wise when determining
the best choice. Sometimes the assistance of legal council or strategic consulting services may also
be a wise consideration if necessary.
Sources:
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Expenditure Decisions; Jeremy P. Thornton; February 20, 2011
2. “Forbes”; The Rise Of The Charitable For-Profit Entity; Evangeline Gomez; January 13, 2012
3. “B Lab”; What are B Corps?
4. “Boston College”; Hunting Stag with Fly Paper: A Hybrid Financial Instrument for Social Enterprise; Dana
Brakman Reiser and Steven A. Dean; September 27, 2013
5. “National Bureau of Economic Research”; The Flypaper Effect in Individual Investor Asset Allocation; James J.
Choi, David Laibson and Brigitte C. Madrian; November 2007
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Friedenwald-Fishman, December 20, 2011
7. “B Lab”; State by State Legislative Status - Benefit Corporation
8. “The Economist”; B Corps: Firms with benefits; January 7, 2012
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Aswath Damodaran
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Options; Kathleen M. Kahle and Kuldeep Shastri, January 2002, revised May 2004
11. “University of Pennsylvania: Wharton School of Business”; (How) Do Taxes Affect Capital Structure; Andrew
MacKinlay, January 2012
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Spring 2009
13. “U.S. Internal Revenue Service”; Business Structures
14. “PacWest Solutions” ; PacWest Services: Company Structure; 2014
15. “Wake Forest Law Review”; Benefits Corporations: A Sustainable Form of Organization?; Dana Brakman Reiser;
September 2011
16. “Nolo”; Learn About Business Ownership Structures
17. “Mashable”; HOW To: Legally Structure Your Startup; Nellie Akalp; August 2, 2010
18. “Foundation Group, Inc.”; Who Really Owns a Nonprofit?
19. “Wall Street Journal”; When Profits Can Take a Back Seat to Doing Good; Angus Loten; January 19, 2012
20. “Digital Media Law Project”; Forming a Corporation in California; July 2, 2014
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22. “Small Business Tax Advisor”; Why Type of Business Entity Should You Choose?
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24. “Leaders Choice”; Top 10 Laws Affecting Businesses in 2012;
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26. “American Bar Association: Business Law Today”; Delaware LLC's and the Implied Covenant of Good Faith and
Fair Dealing; Lewis H. Lazarus and Jason C. Jowers; November 20, 2011
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31. “SPCwa”; Social Purpose Corporations: To B (Corp) Or To SPC?;
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13. 33. “Forbes”; Tax Guide To Master Limited Partnerships; William Baldwin; December 2, 2010
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35. “Cooperative Grocer Network”; Membership Is Ownership; The Cooperative Advantage; Marilyn Scholl; May-
June 2008
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September 2006
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