Legal Structure And Which One Is Right For Your Business
Building a business is similar to building a house. You’ve got to build from the ground up, and without the proper foundation, everything else is suspect.
In business, the foundation is the legal structure chosen at the outset. It alone determines how the business is organized and addresses issues such as ownership liability, tax concerns and more. With so much at stake, it is easy to see why choosing the correct business model is crucial.
For those who are new to the business world, that may sound intimidating, confusing, or both. So the question is, which legal structure or “foundation” is best for your business?
Assessing The Options – An Overview Of Legal Structures For Business
Most people starting “for profit” businesses in the United States have four choices regarding the legal structure for their new venture. Choosing the one that’s best for you largely depends on what you want to accomplish and how you plan to do so. But to begin with, here’s an overview of each one.
The first is a sole proprietorship. This is the most basic legal structure, and as such, it is the easiest to create and the most commonly used. As its name indicates, there is just one owner, who receives all of the business’s revenues and is accountable for all of its shortfalls. Legally, there is no differentiation between the owner and the business itself, which has its advantages and disadvantages. Because the business isn’t taxed separately, filing the necessary returns is fairly easy. On the other hand, this means the owner is also personally liable for any debts the business incurs.
The second type of legal structure is a partnership. The U.S. Small Business Administration defines it as “a single business where two or more people share ownership.” Together, the partners participate in all facets of the operation, benefit from the profits and share accountability for any and all losses. The extent to which they do so depends on the type of partnership arrangement (general partnership, limited partnership or joint venture). In any case, creating a partnership is relatively easy and inexpensive, and filing taxes is fairly straightforward. On the other hand, the partners are subject to “joint and several liability” when it comes to business decisions, transactions and any debt incurred.
The next type of legal structure is a limited liability company or LLC. It offers a great deal of flexibility with regards to ownership and reduced personal liability for the owners or “members.” The members also share profits, which are also reflected on their personal income tax returns. The disadvantage of creating an LLC in some states is that it must be dissolved when a member leaves unless the operating agreement specifies otherwise.
The last, and perhaps best-known legal structure is a corporation. The U.S. Small Business Administration defines a corporation as “an independent legal entity owned by shareholders.” Even though they “own” the corporation, shareholders are shielded from personal liability. But because forming one is trickier than creating other legal structures, it is seldom recommended for new, small businesses with few employees.
Starting a new business and choosing a legal structure for that business is often a daunting proposition. Before doing so, it’s important to evaluate your tolerance for risk; how much you can afford to spend on creating a legal structure; local and state requirements for creating different types of businesses; and tax status.
If you are still unsure about which legal structure to choose, a qualified attorney can assess your situation and determine which one is best. To learn more, call Jurado & Associates, P.A at (305) 921-0976 or email [email protected].