How to Choose the Best Legal Structure for Your Company

Every year, over 627,00 new businesses are started. If you are preparing to start up your own company, you’ll need to consider what ownership structure you’ll choose. There are a few options and the best one will depend on your own needs and goals.

Let’s take a look at your options for the legal structure of a business and how to choose the best one for your company.

Sole Proprietorship

A sole proprietorship is the most simple business structure you can choose with very few set-up costs. There is only one person in this structure, making it very easy to form and exit it.

This type of structure treats both you and the business as the same entity. This means all taxes pass through your return. However, it does not offer any separation to protect your personal or professional assets.

Partnership

A partnership is formed by two or more people. This is a bit more complex than a sole proprietorship. There is little paperwork besides that which your state requires though it may require a lawyer.

Most partnerships report their income or loss on their individual tax returns. There is an option for a partnership to have tax status as either a sole proprietorship or a limited liability partnership. 

Limited Liability Company

A limited liability company, or LLC, allows owners to separate their personal liability from those of the business. However, it still offers the flexibility of a partnership and the ease of reporting income and loss on the owners’ personal tax returns.

An LLC can have one or more members and can be a great option for businesses of almost any size because of the benefits of an LLC.

Corporation

A corporation is a separate entity from its owners. This offers great personal liability protection but can require higher costs and more paperwork.

There are a few different types of corporations based on how you opt to file for taxes. C corporations are owned by shareholders and can have an unlimited number of investors S corporations are usually smaller, but can help small businesses avoid double taxation.

Factors For Choosing The Legal Structure Of A Business

When choosing a business structure, it’s important to consider a few different factors. If you need additional business advice you can discuss it with an expert.

In addition, you should consider how much separation you want between you and your business. LLCs and corporations offer different levels of separation. This can help reduce your risk of loss if your business were to be sued or lose money.

Taxes also affect which business structure will work the best. Sole proprietors, LLCs, and some partnerships claim their share of the profits as part of their personal income. Corporations file their own taxes, which can lead to double taxation if you don’t choose an S-corp.

Sole proprietorships and LLCs offer a lot of flexibility and control. On the reverse, corporations require a board of directors. If you will need outside funding, especially at the beginning, a more structured form, such as a corporation can make it easier to obtain funding.

Choose A Legal Structure That Meets Your Needs

It’s important to choose the legal structure of a business that will best meet your needs, both now and in the future. Each structure has its own benefits and downsides which you’ll need to weigh. 

If you found this article helpful, make sure to read our other business articles too.