Here is all you need to know to choose your business legal structure
Of all the major decisions you have to make when you are about to establish a business, none is more imperative than your business structure decision. Not only will this decision influence how much you pay in taxes, but it will also determine the amount of documentation you have to do, the personal liability you face, and your potential ability to obtain funds in case you ever need business funding. The decision around your business legal structure isn’t one you rush into, and more often than not, it may make or mar your business idea. While structures like sole proprietorship may be easy to run without any guidance, you may need to reach out to some business and legal experts for counsel when setting up a limited company, for instance. However, within the context of this article, you are going to find out about some important factors that are most likely going to influence your business structure decision.
Types of business entities
It is essential to note that there are business structures different out there, all of which are suitable for different purposes. But the type of business entity you choose will depend on three primary factors, namely: taxation, liability, and record-keeping. That said, here are the four most common types of business entities.
Are you a small or medium scale business owner? Do you run an online or a brick and mortar business? Well if you do, chances are you are a sole proprietor; that is, you run your business solely. Take the decisions yourself, fund the business yourself, seek external funding yourself, bear the risks yourself, and if there are profits or losses, they are yours to accept. There is a reason why sole proprietorship is the most common form of business structure. It is easy to form, run, organize, and above all, you have complete control of your business. On the downside, though, a sole proprietorship doesn’t offer much security in terms of your business longevity, success, and accomplishments. More often than not, this type of business structure dies along with the demise of the business owner.
Just as the name implies, this type of legal structure involves the coming together of two or more parties who agree to share in the decisions, risks, profits, or losses of a business. Nowadays, there are many partnership businesses around thriving, even amid competitions. One very big advantage of this kind of structure is that the business doesn’t bear the tax burden of profits or the benefits of losses – profits or losses are passed through to partners to report on their individual income tax returns. However, a significant downside is the liability – each partner is personally liable for the financial obligations of the business.
A corporation is a legal entity that is forged to conduct business practices, and it is made to act as an entity – separate from its founders – to handle the responsibilities of the organization. Like a human, the entity can be taxed and held legally liable for its actions. The major advantage of this structure is the avoidance of personal liability. The downside, however, is its extensive and rigorous paperwork, as well as the high cost involved.
Limited Liability Company
Now to the most popular type of business structure – the hybrid form of partnership. LLC is fast growing in popularity these days because it allows owners to merge the benefits of both the partnership and corporation forms of business. In this type of structure, owners are protected from personal liabilities, and the profits and losses are passed through to owners without taxation of the business itself.
Selecting a business structure
When deciding which business structure to opt for, there are several criteria you need to consider.
Before you choose a legal structure for your business, ask yourself this: to what extent do I wish to be insulated from legal liability? Are you willing to personally shoulder the liabilities of your business or you want to limit it to a certain degree? If you go the sole proprietorship way, then, you are shouldering all the liabilities and risks that come with the business, which means that if your business assets cannot pay off the liabilities of the business, you have to be personally responsible. But if you go the limited liability way, your liability, as well as your rightful benefits, will be limited to the amount of share you have in the business.
As for sole proprietors, they are not usually taxed from the profits they make from their business; instead, they are taxed based on the income they derive from the business. This is the same for partnership. But if you opt for the limited liability company, your business profit will be taxed under the prevailing tax law in the country.
Amount of capital
Do you need a huge amount of capital to set up your business, or maybe you only need a little sum to establish it? The amount of capital required to set up and run your business may also help you determine the choice of legal structure to opt for. If the required capital is something you can afford, then, a sole proprietorship business might be your best bet, but if you require a huge sum of capital, then, you may want to consider partnering with an investor, family member, or friends.
Uday Tank has been working with writing challenged clients for several years. His educational background in family science and journalism has given him a broad base from which to approach many topics. He especially enjoys writing content after researching and analyzing different resources whether they are books, articles or online stuff.