The choices you make when you’re starting your small business are endless. From budgeting, marketing and designing your website to hiring and managing the day-to-day operations. And, while it’s an exciting challenge, it’s also a legal minefield for unsuspecting entrepreneurs.
One of the most vital decisions you have to make as a business owner is to decide which legal structure your business will partake in.
This mini-guide should help you make your decision and avoid many of the start-up mistakes that lead to failure by walking you through the many types of legal structures.
Why Choose a Legal Structure?
A legal structure shapes your journey and it’s no easy choice to make. It takes time, consideration, and a calculated study. The structure you choose influences everything regarding your business from day-to-day operations, to your personal assets and if they’re at risk or not, and it even affects taxes.
There are many business entity types to choose from and they all have their advantages and disadvantages – which you need to be aware of before making your choice.
What you choose affects everything from liability and taxes, the amount of paperwork your business is required to do, your ability to raise money, and the overall control over the company.
So that’s why it’s important to choose the structure of your new business venture carefully. You need to understand how each legal structure works and how it can suit your business. To get a full picture of each one, read on below:
If you want to be your own boss and run your business from anywhere you please, then this structure can work for you. Many startups initially choose it and it’s also ideal for low-risk businesses where the owners would like to test the idea first.
A sole proprietorship is one of the most common and easiest to form as a business organization.
This structure gives you complete control over your business; however, that also means you’re also responsible for all the company’s debts and profits.
Having sole proprietorship means you won’t produce a separate business entity and your business and personal assets and liability are mixed together.
A partnership is when your business entity is owned by two or more individuals and they share the profits and losses.
This is ideal if you want to go into business with family members or close friends or even other professional groups; it allows shared decision-making and control over your entity. There are several types:
General partnerships: where everything is shared equally in terms of profits and control over the company.
Limited partnerships: where one is a general partner with unlimited liability and the rest of the partners have limited liability and control over the company.
Limited Liability Partnership (LLP): an LLP gives all partners limited liability and an equal share of controlling the company. It protects each owner from debts and not one owner will be held responsible for the actions of other partners.
Limited Liability Company (LLC)
An LLC is considered a hybrid structure; it’s the most popular one to choose because it gives you the advantage of utilizing the benefits of both the corporation and partnership business structures.
It’s a good choice for high-risk businesses or owners who want to protect their personal liabilities as well as pay a lower tax rate.
It allows the owners, partners, shareholders to not get to benefit from the tax flexibility of a partnership without involving their personal assets.
Members under an LLC are considered self-employed and are protected from any debts as long as it can be proven no illegal or unethical manners were carried out in the business.
A corporation is a separate business entity. By law, it has its own legal rights and is considered an independent entity separate from its owners and founders. The corporation can be taxed, sued, can sue, own and sell property, and can sell the rights to ownership in the form of stocks.
There are several types of corporations.
A “C Corporation” is taxed as a separate entity and is owned by the shareholders; an S Corporation acts similarly to an LLC or partnership as owners have limited liabilities, and avoid double-taxation.
A “B Corporation” is known as a Benefit Corporation where entities are structured as for-profit ones making a positive impact in the society.
This shouldn’t be confused though with a Nonprofit Corporation as they are rewarded tax exemptions due to helping people.
Lastly, Closed Corporations cannot be publicly traded even though it’s owned by a few shareholders but they have limited liability protection.
There isn’t a right or wrong choice, but your choice may greatly affect your business. After checking all the above types, consider factors like the possibility of growth or change within your business as well as your liability and taxes. The more you understand, the more you’ll benefit your own business.