As you start your business, one of the first decisions you will need to make is what type of legal structure to choose. There are many types of structures available, and each has its own set of advantages and disadvantages. So how do you know which option is best legal business structure for your company? In this article, I’ll cover the five most common forms of business organization in the United States: sole proprietorship, partnership (general or limited), corporation (C-corporation or S-corporation), and limited liability company (LLC). We’ll discuss how they work with each other as well as their pros and cons so that you can make an educated decision about what form is right for your new venture!
–Sole Proprietorship: The simplest form of business. No formal legal paperwork is required to start a sole proprietorship, you automatically fall into this category if you start doing any sort of business, however it’s risky because you are personally liable for business debts and obligations. If you plan to start a low-risk business, this is the simplest way to go without having to spend money on registering your business with your state.
–Partnership (general or limited): Partnerships offer the benefit of combining different skill sets in one company while not creating separate entities that would each need their own set of tax returns filed separately from one another like corporations do. General partnerships require all partners to contribute equally when making decisions about how the business operates, whereas a limited partnership assigns specific roles based on investment size so that some people can be involved without being completely responsible for every decision involving the company’s direction. The main advantage of a partnership is that the owners have unlimited personal liability for business debts and obligations.
–Limited Liability Company (LLC): The LLC is the most flexible of any business structure and offers liability protection without some of the drawbacks that come with a corporation. Essentially, an LLC offers benefits of both partnerships and corporations. It offers the owner or owners personal liability The company has to be registered in every state where it does business, which can get costly if you plan on expanding into other states or countries later. There are three types of LLC’s: member managed, manager managed, or hybrid management where members and managers share in managing the company.
–Corporation (C Corporation): Like an LLC, corporations provide limited personal liability for its owners but have more rules that must be followed than an LLC when it comes time to file taxes or make decisions about how the company operates. Corporations are also treated as a separate entity from their owners by default under federal law, meaning each C Corporation will need its own set of tax returns filed separately from one another like partnerships do; however, they offer less flexibility.
–S Corporation: An S Corporation provides limited liability much like an LLC does; however because they are treated as a pass through entity for tax purposes under federal law there is generally less paperwork associated with filing taxes. Similar to an LLC, the owners or shareholders are entitled to a share of profits and also take on any losses.
So how do you choose the best structure for your business? If you are in a low-risk industry and don’t have business partners, it could be advantageous to start out as a sole proprietorship to test out your concept before investing in legal fees and filing fees.
If you are in a high-risk industry, it is important to consider the advantages and disadvantages of each form, and discuss with an attorney and/or accountant if possible. For example, sole proprietorships have unlimited liability for any debts or lawsuits incurred from operations while LLCs provide limited liability protection against business debts and claims for damages. If your company will be involved in manufacturing or selling goods that may potentially harm others (such as food products), then you should take into account what type of insurance coverage would be necessary.
If you are uncertain about the different types of business structures, take a look in your state’s Secretary of State website for specific filing rules or contact an attorney for help.
Once you have decided on which business structure best suits your needs, then it is time to file with the appropriate government agency in accordance with local regulations. The next step will be finding financing sources such as banks and credit unions that can assist you when starting out by providing loans so that no assets are co-mingled between personal life and work activities.
This is an exciting time and it’s important to consider your business structure and get the appropriate paperwork in place to ensure you are covering all the bases and protecting yourself in the long run.
