When you start a business, you have a lot of choices you have to make — including what kind of legal structure you ultimately want to use for your company.
Your business structure affects everything from your potential personal liability if things go wrong to the type of funding you may be able to raise, but there’s no one way that’s right for everyone.
Here are choices you have to consider:
A sole proprietorship or general partnership
These are easy to use and there’s little paperwork involved. You have no need to register formally with the state, and you can deduct most of your business expenses from your personal taxes. However, you’re also personally liable for the business debts. If your business faces a lawsuit, it could affect your personal assets as well. It’s also difficult for sole proprietors to get loans.
General partnerships are basically the same, only the business has two or more owners. It’s common for spouses to operate as general partners.
Limited partnerships (LPs) and limited liability partnerships (LLPs)
Limited partnerships are registered business entities held by an active general partner and a partner who serves as an investor (sometimes called “silent” partner). The general partner assumes the day-to-day operations and risks while the limited partner is more insulated.
LLPs, on the other hand, are usually formed by professionals, like doctors and accountants. That allows them to pull resources without taking liability for each other’s mistakes, including malpractice.
A corporation exists as a separate legal entity from its owner, and the paperwork can be enormous. In addition, there are various types of corporations possible, including limited liability corporations, S-corporations and C-corporations. Each has their own unique features.
It’s more expensive to create a corporation, but the tax benefits and the insulation against personal financial losses may be worth it. It’s also easier for a corporation to get funding for its ventures through loans.
If you’re having trouble sorting through the intricacies of business formation, an attorney can help you better evaluate which structure will work best for your business and personal needs.