You can start choosing the best legal structure for your business by planning your goals for the company while keeping in mind the local, state, and federal regulations. When you can determine your goals, you can choose your business’s legal structure more easily. Since your business will still expand, you can change its legal structure to fit its needs.
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Continue reading to know the different legal structures for businesses to ensure that you are choosing the right one for your company.
A sole proprietorship is the most basic legal structure. Suppose you do not have a different legal entity for your business. In that case, this is the legal structure for you regardless if its operations are under your name or the business name itself.
Being basic and affordable are the main advantages of a sole proprietorship. However, you and your business assets are not legally separated. Therefore, if your business closed down or you were sued, your assets can be a target for legal accountability by your creditors.
Another basic legal structure is partnership. 2 or more individuals share the ownership of a business. For instance, a chef and his friend plan on opening a restaurant together. Both of them are considered owners, so they share participation and input for this business. Since they both contribute to the business, they also share the profits and losses.
Partnership structure is more complex to define because it changes a lot. They are under state laws. Nevertheless, most states follow the Uniform Partnership Act. This act sets a particular partnership agreement mostly as the real legal basis of the partnership. Therefore, the details can be widely varied.
The profits and loss from this legal structure go through the partners minus the partnership tax. Because there are various risk levels defined in agreements, it is important to understand forms of partnerships with limited and general partners. The agreement should indicate what will occur if one of the partners backs out, the arrangements for buying and selling the business, and, if needed, the liquidation agreement.
If you are considering a partnership structure for your business, you need to keep in mind that you have to do this right. You can hire an expert who has experience in this structure and request remarks about their past and present clients who opted for this. The agreement is complex, and making a mistake can result in many problems.
Limited Liability Corporation
It makes sense to feel intimidated when you think you are personally accountable for the losses of your business should it fall on difficult times. Many business owners feel scared, thinking that the bank could seize their assets if the business fails.
A limited liability corporation or LLC is a mix of sole proprietorship and partnership. Since there is flexibility from either of these two legal structures, there is limited liability for the owners which is identical to a corporation.
An LLC is also often akin to an S corporation. The former provides a mix of some limitations to legal accountability and some tax procedures for asset transfer and profits that are favorable to your business.
The legal entity form of this legal structure is new. You also need to remember that LLCs differ in states. Therefore, the advantages and suitability differ. If you are looking into using an LLC, it is recommended to get advice from an expert.
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A corporation is likely the first legal structure most people think of. The characteristics of a corporation are a more complicated legal structure, more detailed tax requirements, and shareholders.
Corporations can either be a B corporation or benefit corporation, an S corporation or small business corporation, and a C corporation or standard corporation. The most common legal entity that many successful businesses in the US use are the C corporation.
Corporations can transition back and forth from C to S, but this does not happen often. The IRS is strict on how and when these transitions are done. You will need the assistance of a CPA, and in some instances, a lawyer. They will be the ones to help you complete the requirements to switch successfully.
A corporation is the most complicated legal structure. Therefore, if you are to launch a small business and work on your own or with a few people, such as your partners or employees, this legal structure is not recommended for you. Visit this guide to learn more on how does a holding company work.
Large and more established companies can benefit more from this structure. They are also recommended for businesses that plan to sell their stock, who will quickly scale, have many employees or investors outside, or a combination of any of these.
A non-profit legal structure is different because they are not made for profits. Therefore, they are not made to produce revenue for partners or shareholders. Rather, they channel the revenue for a cause, social purpose, or mission.
If your business is for educational, scientific, literary, religious, or charitable purposes, you can opt for this legal structure. This kind of structure qualifies for tax exemption.
Finally, you have a better understanding of ways to choose a suitable legal structure for your business. Picking the right business legal entity is something you need to take seriously. You need to know and follow the legal process in forming a business.
If possible, it is recommended to work with an expert to help make your business legally established and licensed.