Which Entity Structure is Best for Your Startup Business?
When you decide to set up a business, the first real hurdle you will face is what type of entity you want it to be. The decision on the legal entity structure for your business that you make in the beginning will have a huge impact on your taxes, liability, and ownership, later.
In fact, the type of entity structure you choose for your startup will greatly affect all areas of your business operations in the long run. If taking this all-important decision right at the beginning of your startup journey makes you a little apprehensive, remember that there is no single right fit in terms of entity structure or business type.
All you need to do is to find one that aligns closely with the direction and vision you have for your business. You could start with gaining appropriate knowledge about the options available to you, and then determine which structure is best suited for your business.
Types of Business Entity Structures
Consider all your goals; personal, financial, and organizational, and then ask the right questions to see if the entity structure you are choosing will help you achieve each of those goals or not. There are four business entity structures that are commonly used, each one of them with its advantages and disadvantages. Let us first have a brief look at them:
A sole proprietorship is the most elementary and also the most common business entity structure. Registering as a sole proprietorship is going to take the least amount of your time and money. As per the data of the Small Business Administration, more than 70 percent of businesses in the United States are running as sole proprietorships.
In a sole proprietorship, one person is exclusively responsible for the company, including all the operations, debts, and profits or losses. The business is registered in your name, and you have unlimited powers and control over your business.
In a partnership, the business ownership is divided amongst two or more individuals. Further, there are two types of partnerships: general partnerships and limited partnerships.
In a general partnership, the partners enjoy an equal share of accountability as well as reward. On the other hand, a limited partnership allows one partner to retain full or most of the control, while the others share some responsibilities and receive some of the profits but enjoy little or no control.
Limited Liability Companies
Limited Liability Companies (LLCs) follow a more formalized corporate and legal structure. While members in an LLC enjoy some of the flexibility of a partnership, they cannot be held personally liable for any financial or legal liabilities of the business.
In a limited liability company, the legal structure allows for personal assets and liabilities to remain independent from those of the business. There is an agreement that lays down the terms for governance and administration of business operations.
As in a limited liability company, a corporation is also legally recognized as a separate entity to its owners. A corporation is independent of its owners, with its own set of legal rights and free choice regarding owning and selling property or transferring ownership through a sale of stocks.
Factors You Need to Consider for Selecting the Entity Structure
Even after gaining some new understanding and insight into the typical business entity structures, you may still find yourself stuck while trying to make the final choice that is the best fit for your business.
Let us help you further narrow down your selection taking the following factors into consideration:
If you are sourcing the seed capital for your startup from outside sources, you need to know that banks, investors, and venture capitalists all favor the formal structure of a corporation. While an LLC may not be as attractive a proposition as a corporation, sole proprietors and partnerships will inevitably find it hard to tap outside sources for funding their startups.
While no one else but you are liable in a sole proprietorship, a partnership shares expenses and liability between two or more individuals. An LLC is again a step up as it provides the dual advantage of providing liability protection while retaining tax benefits that are similar to a sole proprietorship. Corporations are top of the heap in terms of protection of personal liability.
A sole proprietorship is clearly the best option in terms of simplicity in structure and operations. Partnerships require some type of formal agreement for operations as well as profit sharing. LLCs and corporations are highly complex and rigidly structured organizations, with setup, operations, and reporting at both the state and federal levels.
In a small sole proprietorship setup, being both the individual and the business, you are taxed just once. Similarly, partnerships and LLCs pay personal income tax to manage profits.
Corporations, on the other hand, pay corporate tax on profits after deducting expenses, and the employees also pay personal income tax on their wages.
Experienced Business Contract Attorneys Can Help with Planning Your Startup Strategy
An experienced attorney at the law offices of John. H. Ruby & Associates can review your business goals and aspirations to guide you on the best course of action. We can offer sound legal advice and various alternatives for the entity structure best suited for your business startup. For an in-depth consultation, call today at (502) 895-2626 or drop us a message online.