Anne-Marie Saint-John, Alva, Long Island City, NY >
Choosing the Right Legal Structure for your Small Business
When you take steps to start a new business, one of the very first things you will decide is how to legally structure your company. There are many different choices available to you, and it is important that you fully understand the best way to set up your business to ensure you get the protection that both you and your company will need.
If you have already created a business or marketing plan for your small business, then you will have a good idea of how your first year will take shape. Now it’s time to move on to the paperwork and the legal side of your business.
A company is typically regulated by state, federal, and local laws. One of the first things you should check is what the requirements will be on those levels for you. When you go about the task of registering your business, make sure that you cover all the registrations required on each of these levels, based on your location.
In this post, we are giving you a quick overview of each of the four main options available, along with the core elements you should consider when making your decision.
Partnership
A partnership is when a single business is formed, more than two people share the ownership, and each individual owner contributes to various aspects of the business and shares in the profits and losses of the company. All partners share the liability of the business. This means that partners are liable not only for their own actions but also the actions of the other partners. A variant of this business type is an LLP, also known as a limited liability partnership. Forming an LLP gives an added element of protection, which is why many law firms in the U.S. are structured this way.
Chances are, by now, you will probably already know whether or not you will be partnering with another entity or person for this venture. Forming a partnership can be a great way to raise alternative sources of small business finance, and for many who are not eligible for the SBA loan program, it can be a good way to get the funds you need fast.
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Sole Proprietorship
This essentially a business that is owned and operated by an individual. The government makes no distinction between the business itself and the person who owns it. You can conduct your business activities under your own name, or you may give your company a unique name by registering it under a DBA, also known as a Doing Business Name. This is a quick and easy way to set up a new business; it also gives you straightforward tax planning and preparation requirements.
Corporation
A legal corporation is an entity that is distinct and separate from any of its owners. It has the majority of the abilities that any individual would have, for example, to obtain loans, lend money, enter into contractual agreements, hire staff, own assets, and be sued. It is considered more complicated than any of the other company structures, and it is typically suited to larger, more established businesses with high numbers of employees.
For those looking to get venture capital, this is considered the better option. In terms of protecting personal assets, they are also considered to offer the greatest level of protection, as the founders, stockholders, and directors will not be liable for any of the company’s obligations. A corporation is required to pay local, state, and federal taxes.
Limited Liability Company
Typically referred to as an LLC, this type of structure is less complex than a corporation, yet a little more complicated than a partnership or a sole proprietorship. Owners are not held personally liable for any legal or financial responsibilities of the company. This is one reason why the limited liability company is a popular structure.
If you have completed a business plan for your small business and believe you might want to obtain venture capital funding at some point in the future, it could be worth considering that specific venture capitalists are sometimes reluctant to invest in LLCs due to taxation considerations and the complexity of the structure. However, compared to a corporation, there are fewer formalities to go through, which makes them a more appealing option for some.
These four options represent the most commonly used structures for setting up a new business in the U.S. If you have already written a business plan and are still unsure which legal structure is the best option, you could work with a business planning consultant to help you decide. You should also seek legal advice from a professional who can review your plan and advise which structure would be the best for your new business.
