So, you've got a fabulous idea to meet an unfilled need, create a new customer base, and turn a tidy profit. Now it's time to take that idea and turn it into a reality, which means formally creating your company under a specific legal structure. One of the earliest and most important decisions you will make is choosing exactly what type of business entity is most appropriate to launch your project.
Choosing the Best Structure for Your Business
To put yourself on the path towards success and protect yourself in the event the business fails, it is crucial to pick the right kind of structure. This choice has significantly bigger repercussions than just the level of paperwork involved. The structure of your business has a direct impact on your:
- Available methods for raising capital
- Personal liability if your company is ever sued or held liable for damages
- Tax concerns
- Methods for exiting the business or passing it on to family members
While the type of entity you create has a drastic impact on future operations, it's important to understand that there isn't one single "best" option. Which specific type of structure you should pick hinges on a variety of factors unique to your business plan. Here's what you need to know about the differences between each type of structure before making this critical decision:
- Sole Proprietorship – The simplest type of entity to set up provides the most personal control over your business, but also saddles you with the most potential liability. Your business and personal assets are one and the same with a proprietorship, meaning a lawsuit can devastate you financially. It may also be more difficult to secure startup funds from lending institutions, and you can't sell stock to raise capital. A sole proprietorship can be worthwhile if your business has little risk and a low chance of experiencing legal hurdles, however. In some cases, there may also be benefits to your taxes since you can take a variety of business deductions at tax time.
- Partnership – This is a relatively simple way for two or more people to form a business together, but it is critical to ensure you are doing business with a reliable partner, and to have an attorney thoroughly go over the partnership agreement. Different methods of setting up a partnership exist that should be discussed with legal counsel. For instance, one partner can have limited liability and pay self-employment taxes while the other has unlimited liability but receives the profits, or it instead can be crafted so all partners are shielded from liability and from the actions of the other partners.
- Corporation – Also known as a C corporation, this type of entity shields you from personal liability and offers multiple methods for raising funds, including offering stock. It is also more expensive to form, requires extensive record-keeping, and is taxed differently than sole proprietorships or partnerships.
- S Corporation - Similar to a C corporation, this type of business entity protects you from liability but uses different tax rules. Profits and certain losses can be taxed personally rather than using the corporate tax rate, and you can also avoid issues of double-taxation when profits are taxed on the business and then a second time on your personal taxes. There are more stringent rules for forming an S corporation, however, and it won't be feasible for every type of business.
- LLC (Limited Liability Company) - An LLC provides an option partway between a partnership and a corporation. This entity protects your personal assets from liability so you don't have any danger of losing your home or savings if the business is sued. Still, you do need to consider how self-employment tax with an LLC may affect you.
Talk to an Experienced Business Startup Lawyer
Even the greatest business idea can be easily scuttled by legal problems. Be sure to consult an attorney early in the process to protect your entity and get help making the right moves financially and legally. Set up a consultation to find out how we can assist in choosing a structure, help with any permits and licensing needed for your specific operations, and represent your business if it faces legal challenges.