To start your business on the path towards success and protect yourself, individually, in the event the business fails, it is crucial to pick the right kind of structure. This choice has significant repercussions and should not be made by simply choosing the entity with the least amount of paperwork involved.
Your business structure can have a direct impact on your: available means for acquiring capital, personal liability if your company is ever sued or held liable for damages, tax concerns, ways for exiting the business or passing it on to family, and many more aspects. While the type of entity you create has a significant impact on your businesses operations, it’s important to understand that there may not be one single “best” option. The specific type of structure you select hinges on a number of factors unique to you and your business plan.
Here are a few things to know about various entities to keep in mind when making a decision:
-Sole Proprietorship – an easier entity to set up providing the most personal control over your business, but also saddles you with the most potential liability. Your business and personal assets are one and the same with a proprietorship, meaning a lawsuit can devastate you financially. It may also be more difficult to secure startup funds from lending institutions, and you cannot sell stock to raise capital. On the other hand, this entity may be worthwhile if your business has little risk and a low chance of experiencing legal hurdles.
-Partnership – This is a relatively simple approach for two or more individuals to form a business together, but it is critical to ensure you are doing business with a reliable partner, and to have an attorney thoroughly go over the partnership agreement. Different methods of setting up a partnership exist that should be discussed with legal counsel.
-Corporation (or “C-Corp) – This type of entity shields individuals from personal liability and offers multiple methods for raising funds, including offering stock. It is also more expensive to form, requires extensive record-keeping, and is taxed differently than sole proprietorships and partnerships.
-S Corporation – This type of entity protects also shields individuals from liability but uses different tax rules. Profits and certain losses can be taxed personally rather than using the corporate tax rate, and you can also avoid issues of double taxation when profits are taxed on the business and then a second time on your personal taxes. Like a C-Crop, there are more stringent rules for forming an S corporation.
-LLC (Limited Liability Company) – An LLC provides aspects of both a partnership and a corporation. This entity can protect your personal assets from liability so you don’t have any danger of losing your home or assets if the business is sued.
Consulting an attorney early can immediately help your business avoid common legal issues that could come back to bite you. Worried you can’t afford a business lawyer? We offer varying fee structures to meet your needs and budget. Contact Leon at Roy Law today for your free consultation.