Choosing A Legal Structure For Your Business

By Author: Mr projects
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There are crucial steps to achieve when starting a business. Creating a business plan, finding a location, financing, and obtaining the necessary paperwork are all fundamental. Another important task however, is the determination of the legal structure and form of a future business. Knowing whether or not to be a sole-proprietorship, LLC, partnership, or corporation is going to impact future federal and state tax obligations. Strategically choosing a legal structure is in the best interest of a future business owner. But first, the right questions need to be asked.
These questions will help clarify which type of structure to choose. Once they’re answered, take a look at the several types of legal structures below to find out which one suits your business, as well as what’s required:
What is the vision of the nature and size of your business?
How many individuals will own equity in the company?
What level of structure and formality are you willing and capable of dealing with?
What is the expected profit or loss of the business?
Will your company be vulnerable to lawsuits?
Do you need ...
... to re-invest earnings into the business?
Do you understand the tax implications of the different ownership structures?
Types of ownership structures:
Sole Proprietorship

First-time business owners usually start off with this type of structure because of its simplicity. A sole proprietorship is an extension of the business owner and profits flow into the owner’s tax return without being taxed at the business level. Having a sole proprietorship gives the owner control, but they inherit unlimited liability and become legally responsible for all debts against the business.

There’s not much you need to do to start, besides obtaining a DBA and abiding by any applicable licensing requirements. This is the least expensive form of ownership and it’s also the easiest to dissolve if things fall through.

Partnership

Entering into a partnership means two or more people share ownership of a business. They are relatively easy to set up, just like a sole proprietorship. Even though it’s not required, it’s extremely encouraged to have a partnership agreement which highlights each partner’s present and future contributions, their involvement, and arrangements for a possible liquidation.

Each partner is taxed on the income they receive from the partnership and not on a business level. All partners pay taxes on their share of the business income on their own personal tax returns. Much like a Sole Proprietorship, in a Partnership each partner inherits unlimited liability and become legally responsible for all debts against the business.

Corporation

Corporations are an entirely different entity. Unlike a partnership or sole proprietorship, corporations can be taxed. The owners of a corporation are the shareholders. The shareholders elect a board of directors who is responsible for the management, policies, and major decisions of the organization.

There are certain benefits to incorporating; including tax benefits and protection from lawsuits and liabilities. Also, with a Sub-Chapter S Corporation there are additional tax benefits.

Limited Liability Company (LLC)

The hybrid of the bunch is the LLC. Forming an LLC combines the best of a corporation and a partnership, providing the limited liability of a corporation and the tax flexibility of a partnership. The owners are considered members. Normally, the duration of an LLC is determined when the organization papers are filed. Just like in a partnership, an agreement is not required, but advised to clearly set guidelines for members.

Choosing the appropriate legal structure is imperative. But after careful consideration, the decision will be clear. So whether you choose to be a corporation or even a partnership, make sure to do the research or look for resources to help you get started with your business.

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