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Choosing the Right Legal Entity for Your Business

Posted by Gregory Robinson | Jun 30, 2024 | 0 Comments

Starting a business in the United States is an exciting endeavor, and with numerous tools available, it's easier than ever to tap into the free enterprise system. However, achieving the American dream of being your own boss and running your own company requires careful planning and practical decisions. One of the first and most crucial decisions is how to legally structure your business. This blog will guide you through the different business structures to help you make an informed choice.

How to Choose a Business Structure

Selecting the right business structure is a pivotal step when starting a new business. The structure you choose impacts taxation, fundraising capabilities, filing requirements, and personal liability. Here's a comprehensive look at the different business structures:

Sole Proprietorships

A sole proprietorship is the simplest form of business entity, owned and operated by one individual. This structure is ideal for solo entrepreneurs because it requires minimal setup and offers complete control over business operations. However, it's important to note that there is no legal distinction between the owner and the business. This means personal assets, such as your car and home, are at risk if the business incurs debts or legal issues.

Key Points:

  • Ease of Setup: No formal registration is required, but a DBA (Doing Business As) name may be needed.
  • Taxation: Business income is reported on the owner's personal tax return.
  • Liability: Unlimited personal liability for business debts.

Partnerships

Partnerships are formed when two or more individuals join to run a business. There are different types of partnerships, including general partnerships, limited partnerships (LP), and limited liability partnerships (LLP). Each type affects the level of control, liability, and tax obligations of the partners.

Key Points:

  • Ease of Setup: General partnerships require minimal registration, while LPs and LLPs need formal state registration.
  • Taxation: Income is reported on partners' personal tax returns, with an additional information return for the partnership.
  • Liability: Varies by partnership type; general partners have unlimited liability, while limited partners have limited liability.

Corporations

Corporations are more complex entities, offering a legal separation between the business and its owners (shareholders). This structure provides significant benefits, including limited liability protection, but comes with higher formation costs and regulatory requirements.

Key Points:

  • Ease of Setup: Requires filing articles of incorporation with the state.
  • Taxation: Subject to double taxation (corporate profits and shareholder dividends) unless electing S corporation status.
  • Liability: Shareholders have limited liability.

Limited Liability Companies (LLCs)

LLCs combine the limited liability of corporations with the tax efficiencies and operational flexibility of partnerships. They are a popular choice for many entrepreneurs due to their simplicity and protection.

Key Points:

  • Ease of Setup: Must register with the state and file annual reports.
  • Taxation: Can choose to be taxed as a partnership, sole proprietorship, or corporation.
  • Liability: Members have limited liability for business debts.

We Can Provide Legal Advice for Your New Business

Positioning your new business for success starts with a sound strategy and choosing the right entity structure. For expert legal advice tailored to your business needs, contact us to schedule an appointment.

About the Author

Gregory Robinson

Attorney Gregory Robinson is a native of Alabama. He earned his Juris Doctor (J.D.) degree from Mitchell Hamline School of Law and holds a Master of Business Administration (MBA) degree from Rice University. Prior to practicing law, he worked as a strategy consultant in the financial industry...

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