Determining The Legal Structure Of Your Business (And What Not To Do)

Let’s face it, no one actually likes dealing with all the paperwork that comes with starting a business. There are countless legal details and detailettes to keep you occupied, and at some point, when you grow big enough, you are going to need to enlist the help of professionals.

In the early stages however, there are a few very important things you need to think through, in order to avoid the possible headache and regret a bit later. One of these questions will be how you wish to shape your business. Often this is not a question you even think about properly – all you think about is how to raise the funds and set things in motion.

However, thinking about it now is the only way to save yourself the trouble in a year or two. After all, every startup goes through similar challenges, and some of them can be easily avoided, if you inform yourself on time.

Do Some Research First

Even though you may feel that the legal structure makes no real difference, and that every business structure is in essence the same, this is not the case. The way you structure your business legally will determine the types of taxes you need to pay and in what amount, the liability you yourself will face if anything goes wrong, flexibility when it comes to the change of ownership, and so on.

Before you put anything on paper, make sure to Google as much as you can, and see which of the four main business structures would be the best fit.

Sole Proprietorship

This is the simplest and most straightforward way to register a business. You will be the only owner, and you and your business will legally be the same entity.

This means less tax for you, because your business tax will be a part of your personal tax. If you need to declare bankruptcy however, you will be accountable both as a business, and as a private individual, as your own assets will be in danger.

Partnership

Similarly, a partnership is a type of business where the partners are equally liable for everything that happens to it. Taxes are paid based on the share in the business. As a startup, you may benefit from this type of venture, as you will not be going it alone, and will have someone to share the burden with.

A limited partnership is slightly different, as one person will be the general partner, and all other partners are limited partners, liable for the amount they have invested and nothing more. This is a great option if you are looking to attract investors.

Corporation

A corporation is owned by its shareholders, and you can register either as a C or an S type of corporation. The former offers limited liability to all shareholders – less than in a sole proprietorship. The latter is a more expensive option, but offers the option of having more shareholders (C corporations only allow for a hundred)

Limited Liability Company

An LLC is a mixture of a corporation and a partnership, giving you the best of both worlds. It is an independent entity, meaning the owners are less liable, but remain the sole owners of the company. This is a less complex type of company than a corporation, and it is easier to run.

While LLCs are not always appealing to investors, they offer the most flexibility to their owners, which is why they are often considered the best option for those starting their first business.

We hope these five ideas have prepared you for the business world, and that you are now ready to take on the storm and join the world of entrepreneurs.