How to Choose the Right Legal Structure for Your Company

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There are more than 627,00 new businesses founded every year. You’ll need to decide what ownership structure you’ll use if you’re starting your own company. Based on your own needs and goals, you can choose between a few options. Here is a look at the various options for a legal structure for your business and how to determine which is the best option for you.

Sole Proprietorship

With a sole proprietorship, you can choose the simplest business structure with the least amount of setup costs. It is very easy to form and leave this structure since there is only one person inside.

Your business and you are considered the same entity in this structure. Your taxes are applied to your business. Nevertheless, it does not provide any separation between your personal and professional assets.

Partnership

Two partners form a partnership. There are more moving parts in this type of company than a sole proprietorship. A lawyer might be required if there is any paperwork other than that required by your state.

Partners generally report their earnings or losses through their individual tax returns. Tax-wise, partnerships can be either sole proprietorships or limited liability partnerships.

Limited Liability Company

Limited liability companies separate the liabilities of owners from those of their businesses. Although it offers the flexibility of a partnership, income and losses can still be reported on individual tax returns.

The benefits of an LLC can make it an ideal choice for businesses of almost any size. LLCs can have one or more members.

Corporation

Unlike its owners, corporations are separate legal entities. As a result, they offer excellent liability protection, but can cost more and require more paperwork.

Depending on how you file taxes, there are several types of corporations. Shareholders own C corporations, and there can be an unlimited number of shareholders. S corporations are typically smaller, but can reduce double taxation for small businesses.

Business Legal Structure: Factors To Consider

It’s important to consider several factors when choosing a business structure. Consult with a business expert if you need additional advice.

In addition, you should think about the degree of separation between your personal and business lives. Corporations and LLCs come in many different flavors. When your business is sued or loses money, this could reduce your risk of loss.

In addition to taxes, business structures are also affected by them. Partnerships, LLCs, and some sole proprietors include their profits in their personal income. If you choose an S-corp, your company will file its own taxes, which could result in double taxation.

The flexibility and control that sole proprietorships and LLCs provide can’t be matched. Alternatively, corporations must have a board of directors to operate. A more structured form, such as a corporation, can be beneficial if you are planning on obtaining funding from outside, especially at the beginning.

Decide on the right legal structure for your business

Your business should be structured in a way that will meet both your needs now and in the future. It’s important to weigh the benefits and drawbacks of each structure.

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