You’ll need more than a great idea and a business plan to start your business. One of the first decisions you’ll have to make as an entrepreneur is what legal form your new company should take.
There are quite a few to choose from; corporations, LLC’s, sole proprietors, partnerships, and the list goes on and on. Choosing the structure that’s right for you is a very personal decision. What’s good for Joe may not work for Jimmy.
While this decision may not be the most exciting, it is one of the more important ones. Your new business venture will work out one of two ways; it will either thrive and become successful or fail and lose money. How you set up your business can either make your situation worse or better.
I’ve put together a brief list of the pluses and minuses of the most common types of legal structures for your new business. Enjoy!
If you are starting a business on your own a sole proprietorship may be for you. In this form there is no legal distinction between the owner and the business itself. An advantage to this is that you are only taxed once on your personal income tax return. The disadvantage is that as the owner you are personally liable for the actions of your business, although it is possible to insure yourself from the business. So if your business is sued, your personal assets like your home, car and savings can be used to settle any debts.
You can still choose this legal form if you’re going into business with a partner(s). In this instance it’s called a general partnership. It has all the same advantages of a sole proprietorship including taxation, low set up and maintenance costs and few regulatory requirements. The disadvantages get a bit worse here though because now you are liable for whatever actions your partners do on behalf of the business. Choosing the right partners is paramount for this type of business set-up.
Another choice for the legal structure of your new business is a corporation. There are two types of Inc.’s; a C-Corporation and an S-Corporation.
If you are looking for more liability protection from your business, then a C-Corporation may be the way to go. This type of business structure creates a separate legal entity from its individual owner(s). It makes it easy to exchange ownership between individuals and continue doing business if one or all of the owners dies.
The biggest difference between a C-Corporation and an S-Corporation is the way in which their taxed. S- Corporations are taxed only once, like proprietorships. C- Corporations are taxed twice, the entity is taxed and its shareholders dividends are taxed as well.
A corporate legal structure is best if you have hopes of ever taking your business public. Venture capitalists prefer to deal with businesses with this type of set-up for this very reason. Most Inc.’s find it easier to secure funding for their business. C-Corp.’s can have an unlimited numbers of shareholders, while S-Corp.’s are limited, they can have a maximum of 75 shareholders. The good thing is that shareholders for both types are not held personally liable for the actions of the business.
Both C and S Corporations have high set up and maintenance fees and face more regulatory requirements compared to other legal structures. They must file articles of incorporation, hold shareholder meetings, keep meeting minutes to distribute to shareholders and owners, and hold shareholder votes on major corporate decisions.
A Limited Liability Company (LLC) has characteristics of both corporations and a general partnership. Like Corporations, LLC’s provide liability protection for its owners, so your personal assets are safe from debtors and lawsuits.
One of the best advantages of choosing to make your new business an LLC is that you don’t get double taxed, like some corporations do. Some LLC’s might incur this, but as long you check the box that classifies your business as a partnership you need not worry about this. As an added bonus if your business loses money one year, all members of the LLC can deduct the loss from their income, reducing their tax assessment.
There are other advantages of LLC’s over corporations. You have a lot less paperwork associated with them. You don’t have to keep minutes or put on shareholder meetings, or take shareholder votes for major business decisions. All of which saves you time and money.
Perhaps the biggest advantages LLC’s have over other business structures is flexibility. LLC’s aren’t ruled by as many regulations as corporations are. You can structure your management, profit sharing, and business choices however the members (owners) see fit.
While LLC’s tend to be the most popular these days that doesn’t necessarily mean it’s the best fit for your new business. Administration costs, personal time, taxation and flexibility should all play a major role in your decision. Take the time to review all your options before choosing the right legal structure for your new business. If in doubt consult a professional, like an accountant or lawyer to determine what’s right for you. If it helps, Wealth Authority is structured as an LLC.
Good Luck!
Ethan Warrick
