Also called a business entity, a company’s legal structure is extremely important. It regulates different parts of your company from taxes (federal) to liability (state) when it comes to being sued. Other things it decides on are if you require a board of directors, and if so, how often paperwork is filed. It’s possible to change your structure later, but with that comes a sometimes confusing and messy process that can lead to tax issues and the ending of your business. This article will look at legal structures for your business and how to pick the correct one for you.
It’s critical to choose the right structure from the beginning. The correct one will hinge on what kind of business you’re in and how involved you would like to be in the company. Answering these questions will help determine what kind of structure will work best for you. There are five legal structures available.
This structure is owned by members who decide how they run, determine the Board of Directors, and distribute profit to the members/owners. Many Cooperatives can get federal grants and offer better incentives, discounts, and services. Welch’s and Ace Hardware are examples of Cooperatives.
Also known as a C Corp, it’s a legal system that is independent of the owners. Corporations are allowed to earn profits, are taxable, and lawfully liable. This kind of structure offers the best protection from the owners being personally liable, but the price is higher to form a corporation than the other structures available. Domino’s Pizza, Amazon, and General Motors are all classified as corporations.
Limited liability company (LLC)
This structure is a distinct entity from the owners. This means the owners aren’t usually responsible for the company’s debts or liabilities. It consists of protection that’s limited liability and offers “pass-through taxation.” Some companies that are considered LLCs are Nike, Pepsi, and Sony.
Consisting of a relationship between two people or more, trusts, or corporations. They work together to conduct business. Everyone (or each partner) gives something towards the partnership including money, property, skills, or labor. Establishing a partnership is easy, you get unique taxation, and the promise of growth is likely, especially if you’re trying to get a business loan with several of the partners. Examples of partnerships are Apple, Microsoft, and Ben and Jerry’s.
Many new businesses choose this option as it’s the easiest type of structure. It’s where the business is unincorporated and owned by one person. They exclusively make decisions, accept the entirety of profits and losses, and legal status isn’t separated from the company. The sole proprietor is accountable for everything including any debts owed.
There are numerous advantages to a sole proprietorship including simple setup, lower cost, tax deductions, and it’s more informal, especially when ending your business. Many notable brands started this way, including eBay and Walmart.
Depending on the kind of structure you choose, there are other things you will need to consider as well.
- Forms and paperwork – Each structure has specific tax forms and paperwork.
- Fundraising – Depending on the structure raising funds can be difficult and only corporations can offer stocks.
- Hierarchy – Assembling a Board of Directors and how they operate. Corporations offer closure protection if the founder dies or leaves.
- Liability – Will your assets be protected when you’re being sued? LLC structures are only at a state level, not recognized federally.
- Registration, licenses, and permits – Requires a business structure to obtain.
- Taxes – The structure will determine your tax burden.
Understand that different states have distinct necessities for each legal structure. You’ll also need to check out what’s needed municipally. Each structure and industry has different things that apply to them. Learn the differences and do your research. If you want more help, you can seek out a professional in business law for any advice you need, or network with your industry peers for some insight because they would have gone through the process of choosing a legal structure.
It’s important to choose the best legal structure for your company to protect your business as much as possible. Regardless of the legal structure of the company, the most vital thing to be doing is to continuously generate sales to keep the company profitable. One of the most effective ways to attract new customers to a retail business is through Custom Feather Flags. Place them outside your business or at a trade show booth to entice new clients. They can be printed with promotional messages such as sale, open, and much more. One of the best sources for Custom Printed Feather Flags is Flagdom: https://flagdom.com/custom-flags.
Don’t forget to think about your business needs when it comes to finances, risk factors, and the capability to grow and be successful. As stated at the beginning of the article, it’s possible to change your legal structure later (after registration), but it presents some challenges.
Consider everything conscientiously in the beginning phase of your company. Figure out what your goals are for the company, both short-term and long-term. Think about where you want you and the business to be in five years or more. Take your time before your final decision. Look at the positives and negatives of each legal structure. You need to do your due diligence because determining what structure is the best one for your business is a huge decision and not to be taken lightly. The evolution and success of your company depends on it.