The legal structure you choose for your business is one of the most important decisions you will make in the startup process. Each business entity has its own pros and cons, and it’s important to sort through it all before settling on one. Your choice can greatly affect the way you run your business, impacting everything from liability and taxes, to control over the company.
The key is to figure out which type of entity gives your business the most advantages when it comes to helping you to achieve your organizational and personal financial goals. Here’s everything you need to know when choosing your business’s legal structure.
Types of business entities
1. Sole proprietorship
This is the simplest form of business entity. With sole proprietorship, one person is responsible for all of a company’s profits and debts.
“If you want to be your own boss and run a business from home without a physical storefront, a sole proprietorship allows you to be in complete control,” said Deborah Sweeney, CEO of MyCorporation.com. “This entity does not offer the separation or protection of personal and professional assets, which could prove to become an issue later on as your business grows and more aspects hold you liable.”
This entity is owned by two or more individuals. There are two types: general partnerships, where all is shared equally; and limited partnerships, where only one partner has control of its operation, while the other person or persons simply contribute to and receive only part of the profit. Partnerships carry a dual status as a sole proprietorship or limited liability partnership (LLP), depending on the entity’s funding and liability structure.
“This entity is ideal for anyone who wants to go into business with a family member, friend or business partner, like running a restaurant or agency together,” said Sweeney. “A partnership allows the partners to share profits and losses and make decisions together within the business structure. Remember that you will be held liable for the decisions made, as well as those actions made by your business partner.”
3. Limited liability company (LLC)
A limited liability company is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying the tax and flexibility benefits of a partnership. Under an LLC, members are protected from personal liability for the debts of the business, as long as it cannot be proven that they have acted in an illegal, unethical or irresponsible manner in carrying out the activities of the business.
“A limited liability company offers more protections and separations to businesses than sole proprietorships and is a combination of a corporation and partnership,” said RaShea Drake, B2B analyst with Verizon Business. “Your personal assets and company assets are separated in most cases, and your profits and losses are not taxed at the corporate level.”
The law regards a corporation as an entity that is separate from its owners. It has its own legal rights, independent of its owners — it can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks.
There are several types of corporations, including C corporations, S corporations, B corporations, close corporationsand nonprofit corporations.
- C corporations, owned by shareholders, are taxed as separate entities.
- S corporations avoid this double taxation, much like partnerships or LLCs. Owners also have limited liability protection.
- B corporations, otherwise known as benefit corporations, are for-profit entities structured to make a positive impact on society.
- Close corporations, typically run by a few shareholders, are not publicly traded and benefit from limited liability protection.
- Nonprofit corporations exist to help others in some way, and are rewarded by tax-exemption.
A cooperative is owned by the same people it serves. Its offerings benefit the company’s members, who vote on the organization’s mission and direction.
Factors to consider
For new businesses that could fall into two or more of these categories, it’s not always easy to decide which one to choose. You need to consider your startup’s financial needs, risk and ability to grow. It can be difficult to switch your legal structure after you’ve registered your business, so choosing correctly at the start is crucial.
Read more: https://www.businessnewsdaily.com/8163-choose-legal-business-structure.html