There are a lot of important decisions to be made when a business is created, but one of the most critical choices you will make is the type of legal set. This decision will have a significant impact on how much you need to pay in taxes each year, the amount of paperwork you will need to work through, your ability to borrow from creditors, and whether or not your personal assets (like your family home) will be at risk if your business goes under.
Exploring Your Business Structure Options
This is the most simple legal structure and is a popular choice for small business start ups, consultants and entrepreneurs who:
- Can cover foreseeable legal risks with insurance
- Who do not have any assets to protect
- All expenses and income from the business are included on your annual personal income tax returns
A benefit of this type of structure is that any business losses you experience can offset the income you have earned from other sources. It is also low-cost and easy to maintain.
This structure is not without its drawbacks, however. You are personally responsible for all of the company’s liabilities, meaning that if you get sued or if your business seeks bankruptcy protection, your personal assets such as your home and vehicles may be seized.
Today there are two different forms of partnership:
- General partnership
- Limited liability partnership
In a traditional general partnership, a creditor can chase after any or all of the partners of the company. A limited partnership will involve a general partner with unlimited personal liability as well as limited partner whose liability is usually limited to the amount of cash they have invested in the company. Both types require that partners report profits and losses in their personal tax return.
Forming a partnership is not expensive and it is relatively easy to create. The drawback is that general partners can be personally at risk, even if another less liable partner is the one responsible for driving the business into a financially sticky situation.
There are two types of corporations which can be formed:
S-corporations are more common while C-Corporations are usually used to create high-profile ventures. Both types are independent legal entities which are separate from its owners, meaning that owners have greater personal liability protection should the company be sued or file for bankruptcy. Maintaining this type of set up is more expensive and complex than a sole proprietorship or a partnership.
Limited Liability Company (LLC)
This set up was created to provide liability protection to companies without double taxation. The benefit to an LLC is that you receive liability protection without several of the formalities associated with forming a corporation. They are also less expensive to set up and there is no limit to the number of shareholders you may have (unlike an S-Corporation which has a limit of 100 shareholders).
An agency involves two parties, one of which (the agent) is authorized by the other (the principal) to perform a select set of actions on behalf of and for the principal. When businesses need to or find that there is a benefit in creating an agency, it is important to seek legal assistance.
After a successful business is set up, a lot of entrepreneurs are tempted by the idea of franchising. This is best considered with the help of a franchise or business attorney who takes the time to understand your specific business.
Questions to Ask Yourself
When deliberating between what type of business you should form, there are a number of factors which need to be evaluated. You need to consider all of the following:
- Legal Liability: If the potential losses associated with the business are high, you will want to keep your personal liability to a minimum
- Tax Implications: This will be based on your goals as a business owner and your individual situation. There are more tax options available to corporations than proprietorships and partnerships
- The Immediate and Future Formation Costs: Formation costs can be significantly higher for some formation types over others
- Flexibility: Some businesses may need maximum flexibility while others can keep it to a minimum
- The Future: You need to consider issues such as what will happen to the business when you die, or what would happen if you decide to sell your share of the business partnership
If you have never started your own business before or have questions about business litigation and commercial law, it is imperative that you speak with an attorney who specializes in business law.
At Rick Dane Moore & Associates Law Firm, P.L.L.C., we ensure that all of our clients leave our office well-informed and able to make the best decisions possible for their business today and in the future.
We invite you to ontact one of our experienced business attorneys today at (405) 366-0373.