Deciding on the type of legal structure is one of the primary considerations when starting a business. Although it may seem like a simple matter, take note that your business structure significantly impacts the personal liability you hold and the taxes you pay as a businessperson.
Hence, you should choose the proper legal entity for your business during the initial stage of operations.
To choose the proper legal structure for your business, consider the information below:
1. Give Thought to Your Business Structure Options
- Limited Liability Company (LLC)
LLC is a hybrid business structure that protects a person’s assets from liability. It allows the personal income they gain to be taxed one time. In addition, LLCs can have an infinite number of members and an obligation. They’re responsible for filing an income tax return, but their actual revenues are not taxed individually.
If you plan to operate a business with a small group of owners and need liability protection, this structure can be beneficial. Furthermore, suppose you’re looking to establish your business in Florida and are considering LLC as a legal entity, you should read about the Florida llc operating agreement to know the types of entities and the issues that they address.
- Sole Proprietorship
A single person is responsible for all business profits and debts with sole proprietorship. This structure is famous for being easy to establish for most small businesses. Once business owners are registered and licensed within their state and local authority, they’re good to go. Furthermore, if your business is in an enterprise where lawsuits are uncommon, sole proprietorship may be worth considering. However, your assets have no legal protection.
There are two types of corporate entities: C-corp and S-corp. C corporation is an entity with articles of incorporation, also known as “charter,” granted by the state. This corporation can trade shares of stock to raise capital, and shareholders become part-owners with a stake based on the percentage of their investments. A C-corp business structure gives the best protection against business liabilities. There are no limits to the number of investors and investments.
S corporation’s structure is similar to C corporation, but a particular classification from the Internal Revenue Service (IRS) exempts profits from double taxation. With S-corp, your revenue will flow through your tax return and have protection against business liability.
2. Evaluate Various Factors
A corporation has less personal liability because the law carries its legal entity. Customers and lenders can sue the corporation, but they can’t access the shareholders or any personal assets of the officers. An LLC provides the same liability protection but with the tax benefits of a sole proprietorship business structure. Moreover, a partnership business entity shares the liability between owners as specified by their partnership agreement.
The possibilities to reduce taxation should be regarded based on objectives and the condition of the business owner. For instance, if you’re planning to raise capital, a sole proprietorship structure may not be the most suitable option for you. You should consider working with an accountant or business advisor to help you pick the best business structure that fits your objectives.
There’s nothing easier than sole proprietorship when it comes to setting up your business. You just need to register your name, start running your business, make a profit and loss report, and pay taxes as personal income. Nevertheless, it can be challenging to acquire outside funding. On the other hand, partnerships need a signed agreement to specify the roles and profit margin. LLCs and Corporations have many reporting requirements with federal and state governments.
3. Think About Future Funding Needs
Many of the business identity decisions you’ll make during the start-up process will influence your ability to raise funds. Therefore, aim to create a vision on the type and percentage of outside funding that you’ll need for business expansion.
For instance, suppose you may be looking for conventional debt financing through a bank. Any owner with at least 20% shares needs to sign a personal guarantee. If you have business partners or other investors who don’t want this liability, they’ll need to limit the percentage of their shares.
Overall, choosing the proper legal structure for your business is essential as it impacts several financial matters. So, make sure you choose the best legal entity and consider the essential factors in running your business. Remember, once you’ve picked your business structure and later decide to change it, you can welcome growth and streamline the operations during economic changes.