Which Structure is Fit for Your Small Business?
The structure of your small business startup plays a large part in its fate. Choose the right structure, and you’ll shield yourself from legal liability, mitigate the entity’s tax burden and pave a path toward long-term financial success.
Here’s a quick look at certain things you need to know when choosing a legal structure for your small business startup.
Sole Proprietorship vs. Partnership
Sole proprietorships are one of the most common forms of small business startups. One person owns the business entity; this individual is responsible for the business’s operations and functions.
There is no need for a distinct legal entity to be formed with a sole proprietorship. The sole proprietor is legally entitled to the entity’s profits, yet this individual is also legally liable for liabilities, financial losses, and debts accrued by the enterprise.
On the other hand, small business partnerships are those in which two or more people or entities own the startup. Both partners contribute startup capital to the business. The partners also share in the enterprise’s profits or losses.
Is It in Your Interest to Start a Corporation?
Corporations differ from sole proprietorships and partnerships.
They are distinct legal entities owned by a group of shareholders, managed by a board of directors, and operate independently from their owners. The corporation bears the burden of legal liability for the enterprise’s debts and actions instead of the shareholders.
The downside to launching a company is that it is of greater complexity when juxtaposed with other business structures. Add in the fact that companies are that much more expensive as a result of administrative fees along with legal/tax hurdles. There is even more reason to consider alternative legal structures for your small business startup.
We should be aware that companies can sell ownership shares of the enterprise. The prospect of owning such shares generates interest in the form of investment capital as well as the interest of potential “rainmaker” employees.
Types of Corporations
There are different types of corporations. As an example, consider the following corporation options:
- C corporations are owned by shareholders and taxed as distinct entities.
- B corporations and nonprofits are used for the purposes of benefitting the greater good, triggering tax exemptions.
- S corporations are optimal for small businesses as they sidestep the financial challenge of double taxation and provide limited liability protection.
- Closed corporations, usually headed by a couple of shareholders, enjoy limited liability protection and offer greater latitude than publicly traded businesses.
- Open corporations are open for trading on public markets (Microsoft, Apple, Adobe, Proctor & Gamble, etc.)
If in Doubt, Prioritize Legal Liability Mitigation When Choosing a Business Structure
The last thing you need is a lawsuit against your startup to result in the loss of personal assets. Launch a corporation, and shareholders’ assets will be shielded in case of a lawsuit against the enterprise. The only financial risk in the context of investment and legal action is the money invested in the company’s shares.
Opt for a sole proprietorship, and there won’t be any formal legal separation between the owner and the business. This means the owner of the enterprise has the potential to be held legally liable for the business’s lost lawsuits and debts.
There’s also the limited liability company (LLC) structure that shields the business owner’s personal assets against lawsuits. The LLC structure essentially separates the owner’s finances from the business’s.
Schedule Your Appointment With Niswanger Law
Are you thinking about starting a business or have already planned one? Meet with our business law attorney in West Monroe, LA for guidance.
Reach out to us today at (318) 953-0071 to schedule a consultation. Our office is located at 3814 Cypress Street, West Monroe, LA 71291.