How do I choose a business structure?

| Apr 30, 2021 | Business Formation |

Starting a business includes pressure to make numerous decisions geared toward long-term success. One of the most important choices you’ll make is the legal formation, or structure, of your organization.

There are many options for structuring a business. Your choice will affect asset protection – both business and personal – tax liability, operations and legal requirements.

Formation pros and cons depend on what is most important to you. Possibilities include a:

Sole proprietorship

As a sole proprietor, there’s no separation between your personal and business assets or liability. Therefore, you could be held personally responsible for business obligations.

Little paperwork is necessary to establish your entity and working alone inherently reduces legal disputes. Financing, however, may be difficult to obtain.

Partnership

You can form a partnership with two or more individuals who agree to share decision-making and financial responsibilities.

In a limited partnership (LP), one person has unlimited liability. The others have partial control of the organization and, as a result, restricted accountability. A limited liability partnership (LLP) protects everyone involved. This includes the repercussions of another partner’s potentially harmful business decisions.

Partnerships allow entrepreneurs to divide responsibilities as they so choose. Documented agreements must clearly define roles to minimize possible contention.

Corporation

A corporation is its own legal entity, separate from its founder, shareholders and employees. Formation costs are higher than other structure options, but the various types of corporations offer the most protection from personal liability. Just be aware they also open the door for extensive regulation.

Corporations hold the potential to go public and raise capital through selling stock in the company or achieve tax-exempt status for nonprofit work.

Limited liability company (LLC)

One of the key advantages of this business structure is minimized personal accountability for financial problems or legal action against the company. Depending on your goals, you might consider an LLC a positive combination of a partnership and corporation. LLCs typically involve greater formality than partnerships, with less oversight and tax obligations than a corporation.

Considering your specifications, you’d be wise to get the counsel necessary to structure your business accordingly.