When you set up your business, there is quite a bit of upfront work involved. Some things, like launching your website, are customer-facing. Others, like setting up the legal structure for your business, are behind-the-scenes. But sometimes, those things that aren’t as evident to your customers are the most important. Picking the best legal structure for your business is vital because it affects significant aspects of your business, such as taxes, ownership, and personal risk. Let’s look at the different types of structures to help determine which is for you.
Sole Proprietorships
This is the most accessible type of business you can set up. You may choose this route if you want to get up and running quickly. We recently wrote about sole proprietorship, so we won’t go into too much detail here, but here’s a quick rundown.
It’s the type often used by entrepreneurs focused on being their own boss. They are okay with the fact that business assets and expenses are blurred with their personal ones. Instead, their main focus is getting the business off the ground.
The downside is that when you have a sole proprietorship, both your business and personal assets are exposed to legal risk. For example, if you’re a plumber that accidentally leaves a tool at a client’s house and they end up in the hospital, you may lose everything. Your home, car, and more – because your business wasn’t a separate entity from yourself.
Partnerships
A partnership is basically a sole proprietorship with multiple owners. There are two main benefits:
- The risk is spread across multiple people
- “Two heads are better than one” – you have more person-hours and brainpower to grow the company
The downsides are similar to those of a sole proprietorship. The business’s assets and liabilities are tied to the owners’ personal assets. If something happens and your company gets sued, the courts can come after your personal belongings.
Limited Liability Corporation
The Limited Liability Corporation, or LLC, is almost like a blend between a sole proprietorship or partnership and a corporation. It is also considered by many as the best legal structure for your business. It makes taxes easy because the business income and losses can be included in the owner’s personal taxes. But, on the flip side, it also provides a corporation’s legal protection.
Some people see an LLC as the best of both worlds. The main thing to keep in mind is that most business owners who start LLCs don’t plan on the business becoming huge. While LLCs can definitely become very large – some common examples are Pepsi, Sony, and Nike, most tend to be much smaller.
Corporations
A corporation is an entirely separate legal entity from its owners. It can buy or sell property or be sued. In addition, corporations can sell stocks to expand the ownership pool. Sometimes they may even repurchase their stocks to bring more ownership to the company.
There are many different types of corporations, but the two most common are S-Corporations and C-Corporations.
S-Corps are designed for small businesses. Generally, you will only have a small number of owners in this legal business structure.
C-Corps can have an unlimited number of owners. Usually, the companies filing to become a C-Corporation are very large companies that want to be listed on a stock exchange. A few examples are Apple and Amazon.
Conclusion
There’s no right or wrong way to go when deciding the best legal structure for your business. It all depends on what type of business you want to set up.
That said, we highly recommend our clients consider filing for either an LLC or corporation instead of a sole proprietorship or partnership. While you may think nothing wrong can happen that will cause your business to get sued, you never know. Having that extra-legal protection will help you sleep at night because you’ll know that even if the company has a fallback, at least you won’t lose all of your personal assets as well.
Do you need more personalized advice? Send us an email or call us at 714.456.9118, and we’ll talk to you soon!
