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A Guide to Legal Business Structures for Entrepreneurs

Although it’s rarely the first thing that entrepreneurs worry about, the legal business structure of your company can shape the future of your business. Previously, in an article about incorporating your small business here on Business Magazine, we tackled the key differences between a corporation and a sole proprietorship. In this article, we’ll dive deeper into partnerships and limited liability companies (LLCs) as well. So, which of these legal structures can help your business hit the ground running?

Sole Proprietorship

This structure is the simplest, cheapest, and fastest way to start a small business. As the sole proprietor, all of your business’ taxes, finances, and legal matters are your personal responsibility as well. Depending on where you’re from, you might need a small fee to register your business. And depending on the nature of your product or service, you may also need to tackle regulatory fees and paperwork, which you can learn more about in our feature titled ‘Everything You Need to Know About Regulatory Compliance’.

Partnership

Put one or two proprietors together and you have a partnership. Although states have different partnership structures, there are typically two types of partnerships: general and limited. The former ensures equal footing for all partners in terms of not just profits and responsibilities, but legal liabilities as well. The latter allows limited partners to be legally designated only as investors, which absolves them from both legal liabilities and day-to-day responsibilities. And while partnerships are required to file tax returns, it’s for informational purposes only, and members of partnerships are taxed pretty much the same as any sole proprietor.

Corporation

Attaining legal liability protection is the key concept behind becoming a corporation. Although filing articles of incorporation can be an expensive and lengthy process, it essentially designates the business as a separate legal entity from its owner. This means that corporate shareholders cannot be sued and neither can their personal assets be seized for any legal liabilities or debts that the corporation itself incurs. Meanwhile, the corporation can be sued, can sue others, and if necessary, its assets may be seized to pay for liabilities. However, this legal protection for shareholders comes at the cost of ‘double taxation’ – you will be taxed both at the personal income and at the business level. Corporations are also subject to creating a formal board for voting on major decisions. At the same time, incorporating also means being able to sell percentage points of your business for investment purposes, which greatly widens opportunities for funding. New York is currently home to the highest number of corporate headquarters out of any state, while cities like San Francisco, Washington, D.C., and Seattle also have their fair share of Fortune 500 companies.

Limited Liability Company

Forming an LLC gives you and other members a similar but limited form of legal liability protection as corporations – but without the double taxation. The LLC is a fairly new structure compared to others on the list. In 1977, Wyoming became the first state to legislate LLC formation, which means that the LLC formation rules for every other state was based on theirs. In a post on LLC formation in Wyoming by ZenBusiness, it states how it includes the mandatory filing of articles of organization, and the optional filing of an operating agreement. Although the latter is not a requirement in Wyoming and most other states, it can allow you to determine the legal structure of your company, how profits are divided, and other regulations.

Remember that you’re never stuck with the legal business structure you start with, and you can choose to change it if necessary. At the same time, making such changes takes time and money which not all entrepreneurs can afford. So before you sign any papers, make sure to consult with at least your accountant, business attorney, and insurance agent to determine which structure can get your business idea started on the right foot.

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