Choosing a Legal Structure

One of the most important choices you will make when forming your new business is which legal structure to choose from. Also called a business ownership structure or business form, choices include LLCs, partnerships, sole proprietorships, corporations, non-profits, and co-operatives.

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 fit for your organization. The following resources will help new small business owners decide which legal structure is best for their business by examining the pros and cons of each, relevant investor issues, and more.

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Liability for Business Debts

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

• Corporation
• Limited-liability company (LLC)
• Limited-liability partnership (LLP)
• Limited partnerships (LP)
• General partnership
• Benefit corporation

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.

Things to Consider When Choosing a Business Structure

When you begin weighing the pros and cons of each business form, the sheer volume of information can seem overwhelming. The most important thing to consider is making sure your particular business model qualifies for your proposed business structure.

For example, if you are attempting to form an S-corporation, you can only have a limited number of shareholders.

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

Drafting and Filing Documents When Forming an LLC

Creating a limited liability company (LLC) requires you to take several important steps depending on your state. You'll need to first file Articles of Incorporation with the Secretary of State.

All members of your LLC should enter into an operating agreement, setting forth the rights and rules of the newly formed company. In some instances, the LLC will also need to apply for a tax identification number.

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 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.” This means they are subject to corporate taxes as well as taxes on individual shareholder income.

Seeking Out a Business Attorney

Choosing a legal entity for your business takes research and effort to ensure you are complying with the laws. You may want to hire a business attorney to assist you with the more challenging aspects of small business formation, such as drafting and filing documents and complying with local laws. Whether you find yourself grappling with a business debt liability issue or just need some guidance on whether to go with a sole proprietorship, a local attorney experienced in business organization can help.