According to the United States Small Business Administration Office of Advocacy, there are 31.7 million small businesses in the United States today. If you are one of the many people in the United States considering starting a small business, you may have many questions, including how to pick the right business legal structure to ensure legal and financial protection. Many different factors come into consideration when making such an important decision. Consider contacting an experienced small business attorneys at Ferlito Law Group for legal support, and to learn more about your legal options.
Picking the Right Business Legal Structure Matters
There are four primary types of business legal structures for businesses: sole proprietorship, partnership, Limited Liability Company (LLC), and corporations (S corporations and C corporations). Before discussing these different kinds of structures, however, it is important to understand why picking the right legal structure matters. Some of the key factors that business legal structures impact include:
- Taxes: The business structure dictates how business income is taxed and the rates at which that income is taxed.
- Liability: Determining liability dictates who is responsible for debts and other liabilities, such as damages, incurred by the business. Some structures hold the owner personally liable, while others do not.
- Paperwork: Different business legal structures require different paperwork, including tax forms, articles of incorporation, and government reports, depending on the structure.
- Raising funds: The kind of structure you opt for will impact the ways that you can fundraise for the business. For example, while sole proprietorships usually do not offer stocks, corporations can.
These are just some of the many different factors it is important to consider when deciding upon one of the four primary business legal structures.
A sole proprietorship is the simplest form of business legal structure. The business is owned and run by a single person and there is no legal difference between the owner and the business. Key characteristics of a sole proprietorship include:
- There is very little paperwork, as there are no partners or executive boards.
- The setup costs tend to be low, as typically the only fees associated with it are license fees and business taxes.
- The owner has personal liability for any liabilities or damages that the business incurs.
- Taxes pass through the owner’s personal tax return.
- It is easy to start and end the proprietorship, as dissolving the business does not require formal paperwork.
A sole proprietorship is considered an informal business structure, as it does not offer taxation benefits or personal liability protection. They are most appropriate in situations of low risk, in which there is a low chance of liability or financial loss, and in cases where the customer base is small.
Partnerships are another form of informal business legal structure. A partnership is created between two or more people in business seeking to earn a profit. While they can be created with little formality, there should be a partnership agreement that stipulates the rules of the partnership including profit and loss sharing, ownership percentages, and dissolution terms. Key characteristics of partnerships include:
- Partnerships are required to file annual information returns with the IRS to report income and losses but do not pay federal income tax. Instead, these profits and losses are passed through the owners based on their percentages outlined in the Partnership Agreement.
- The owners have personal liability.
- Partnerships are easy to create, but often require the assistance of an attorney to create the partnership agreement.
- Partnerships often have more growth potential than sole proprietorships because it is easier to obtain a business loan if there is more than one owner.
Deciding whether to opt for an informal or formal business legal structure can be a difficult decision to make. If you are considering creating a business partnership, contact the experienced and dedicated business attorneys at Ferlito Law Group to ensure your legal and financial rights remain protected.
Limited Liability Corporations (LLC)
According to the United States Census Bureau, there were over 400,000 applications for businesses in March of 2022. One common business structure is Limited Liability Corporations (LLC). Limited Liability Corporations are a type of formal business legal structure that functions as a hybrid of a corporation, general partnership, and sole proprietorship. The owners are referred to as members and can include individuals, corporations, other LLCs, and foreign entities. Key characteristics of LLCs include:
- Business income is reported by LLC members on individual income tax returns.
- LLC members are protected from personal liability for debts or damages. This is known as “limited liability” and means that if the business faces a lawsuit, only the business assets are at risk, not the personal assets of members.
- LLCs require more paperwork than proprietorships or partnerships because there must be articles of organization and operation agreements that determine factors such as member rights and responsibilities, management structure, and buying and selling provisions, among other requirements.
Both S-corporations and C-corporations are the most complex form of business legal structures and can take many different forms. Simply put, corporations are legal entities that are separate from the people who own or run them. Some key characteristics of corporations include:
- Depending on the type of corporation, they must either file their tax return or may elect to pass the income through to owners, known as shareholders, to report on their taxes.
- Ownership of corporations is determined through stocks.
- They are more complex to form, with more legal and accounting requirements.
- Corporations do not cease to exist upon a shareholder’s death and shareholders are not personally liable for any debts or damages incurred by the company.
Corporations are often more appropriate for larger established companies that employ large numbers of people and have a larger customer base.
Consider Consulting An Experienced Business Attorney To Learn More
Determining what business legal structure is most appropriate for your small business can be a complicated decision. It may be helpful to consult with experienced business attorneys who can guide you in selecting the structure that is most appropriate for your needs. Consider reaching out to the skilled attorneys at Ferlito Law Group for help navigating the difficult questions and processes that come with starting a small business.