Selecting the best legal structure for your specific entrepreneurial vision is a foundational undertaking. It’s a choice that will impact your new company’s tax obligations, your ability to raise capital, the level of administrative complexity you’ll face, and, importantly, your personal liability in the event that something goes wrong.
Due to the consequential nature of this decision, you should carefully weigh the pros and cons of various business structures to better ensure that your ultimate choice aligns with your goals, financial situation and the level of personal risk that you’re willing to accept.
Options, options everywhere
The most common legal formation structures for small businesses include corporations, sole proprietorships, limited liability companies (LLCs) and partnerships. Each has its advantages and drawbacks, and each caters to a different kind of entrepreneurial vision.
A sole proprietorship is the simplest form, wherein a business is owned and operated by a single individual. This structure is straightforward to establish and offers an owner complete control. However, it does not provide a legal distinction between the owner and the business, meaning an owner’s personal assets could be at risk if the business incurs debt or is sued.
Partnerships, function much like sole proprietorships, but they’re owned by more than one individual/entity. And, like sole proprietorships, they are pass-through entities wherein owners are taxed directly on their personal returns for the company’s activities.
An LLC is a popular choice for small business owners because it affords liability protection with the tax benefits and flexibility of a partnership or sole proprietorship. This structure can be more complex and costly to set up and maintain, but it’s often worth it for the liability protection and flexibility in management.
Corporations are the most complex and formal business structures. They provide the strongest protection in re: personal liability but come with increased regulatory requirements and taxation rules. The administrative burden and cost of maintaining a corporation can be significant and isn’t usually ideal for most “traditional” small businesses.
The right structure will set your company’s foundation for operational success, so carefully weigh your options before committing to one option over the others.
