Choosing a Legal Structure

The type of business entity you choose will depend on several factors such as liability, taxation and record keeping. The key is to find the best structure for your organization.

The following resources will help new small business owners decide which legal structure is best for their business.

These links give detailed information about each business structure.

• Corporation

• Limited-liability company (LLC)

• Limited-liability partnership (LLP)

• Limited partnerships (LP)

• General partnership

This article compares the pros and cons of each business structure.

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Consider Limiting Liability for Business Debts

No business owner wants to be personally liable for the business’s debts or pay out-of-pocket for a judgment against the organization. The type of business structure you choose will significantly impact your personal liability. There are a number of business entities available to help shield you, such as:

Consider avoiding the sole proprietorship model if you want maximum asset and liability protection. Sole proprietors benefit from the easy setup and freedom of being self-employed, but there is risk involved. There’s no legal or tax separation between you and your business in a sole proprietorship. If someone sues your business, they can come after your personal assets.

Other Considerations When Choosing a Business Structure

The most important thing to consider is making sure your particular business model qualifies for your proposed business structure.

For example, a corporation may be beneficial for a company to raise capital by issuing stock. A sole proprietor may be better served by forming a limited liability company (LLC) which has the advantages of protecting personal assets like a corporation and pass-through taxation, similar to a partnership.

Consider what regulations and reporting requirements you will have to follow depending on the structure you choose.

Drafting and Filing Documents When Forming a Business Entity

Creating a business entity requires you to take several important steps depending on your state. If you are forming a corporation, you file articles of incorporation with the secretary of state. If you create an LLC, you file articles of organization. If you are forming a limited partnership or limited liability partnership, you file with the state to register those entities.

Business Forms and Federal Tax Planning

Making the decision to start your own business is a huge endeavor. Tax planning and preparation is key to minimizing tax liability for your small business. Be sure to research U.S. tax codes, in addition to paying attention to changing tax laws each year.

How you choose to structure your business at the outset can have lasting implications for the future and affect your profit margin. For example, sole proprietorships do not file separate corporate tax returns with the IRS. Instead, any business income or losses “pass through” to the owner’s personal income tax returns.

On the other hand, C-Corporations (c-corps) are subject to “double taxation.” Corporate profits are taxed on the corporate level and then again when they are distributed to the shareholders. By forming an LLC, which is a pass-through entity, the profits pass through to the individual owner’s personal tax returns.

Seeking Out a Business Attorney

A local attorney experienced in business organization can help you choose the right business structure for your startup. Additionally, they can help with the more challenging aspects of small business formation, such as drafting and filing documents and helping your business comply with legal requirements.