Different legal structures have obvious advantages and disadvantages. In most cases, the criteria you evaluate to choose the right format are as follows: The structures described here only apply to for-profit companies. If you`ve done your research and are still unsure of the right business structure for you, Friedman recommends talking to a business law specialist. For more information, see Small Business Administration Choosing a Business Structure. Choosing between an LLC and a sole proprietorship is a difficult choice when it comes to legal structure. Many entrepreneurs start their business as a sole proprietorship because they are easy and inexpensive to start and maintain. All profits and losses “flow” into the owner`s personal tax return, and the owner does not have to pay business tax. Each new company must form a business unit by choosing a legal structure under which the company will operate. As their businesses grow, many sole proprietors restructure their businesses into LLCs that offer the tax benefit of transfer and limited liability protection. Liability: A corporation is an “immortal” legal entity, which means that it does not end with the death of the shareholder. The shareholders of the company have limited liability because they are not personally responsible for the debts and obligations of the company.
Shareholders cannot lose more money than the amount they have invested in the business. Like the provisions of an LLC, shareholders must be careful not to “penetrate the corporate veil.” Personal checking accounts should not be used for commercial purposes and the company name should always be used when interacting with customers. Here are some of the benefits of this business structure: Common examples of business structures include corporations, partnerships, holding companies, nonprofits, subsidiaries, and limited liability companies. Here are some examples: In addition, business owners with these two business structures must elect senior executives who choose to run the business and keep detailed records of all critical business decisions. Companies are the most complex business structure. A company is a legal person that is distinct and independent of the persons who own or manage the company, namely the shareholders. A company has the ability to enter into contracts separate from those of the shareholders, but it also has certain responsibilities such as paying taxes. Businesses are generally more suitable for large, established businesses with multiple employees or where other factors apply (for example, if a business sells a product or provides a service that could expose the business to significant liability). Ownership is determined by the issuance of shares. The law considers a corporation to be a separate entity from its owners. It has its own legal rights, regardless of its owners – it can sue, be sued, own and sell property, and sell the property rights in the form of shares.
Business application fees vary by state and tax category. For example, in New York, the fee for the S Corporation and the C Corporation is $130, while the fee for non-profit organizations is $75. When you start weighing the pros and cons of each form of business, the amount of information that comes to you can seem overwhelming. The most important thing to keep in mind is to make sure that your particular business model is appropriate for the business structure you are proposing. For example, if you`re trying to form an S company, you may only have a limited number of shareholders. Also consider the regulations you need to follow depending on the structure you choose. One of the most important decisions you will make when starting your new business is the legal structure you can choose. Choices, also known as a business ownership structure or form of business, include LLCs, partnerships, sole proprietorships, corporations, nonprofits, and co-operatives. The type of business entity you choose depends on several factors such as liability, taxation, and record keeping.
But the key is to find the best solution for your organization. The following resources will help you decide which legal structure is best for your business by looking at the pros and cons of each business, relevant investor issues, and more. A Benefit Corporation (B Corp) is an organization engaged in what is sometimes referred to as triple bottom line – an extended version of this business concept that includes social and environmental outcomes as well as financial results. To this end, a B Corp seeks to identify social missions and demonstrate companies` sustainability efforts. In return, the organization may be entitled to certain types of legal protection, bid protection, or tax benefits. Here are some important factors to consider when choosing the legal structure of your business. You should also plan to consult with your CPA for advice. The sole proprietorship is one of the most common legal structures for small businesses. Many popular businesses started as sole proprietorships and eventually became multi-million dollar businesses. Here are some examples: Incorporation: Corporations are more complex corporations to create, have more legal and accounting requirements, and are more complex to operate than sole proprietorships, partnerships, or LLCs. One of the main disadvantages of a company is the high level of governance and oversight by the board of directors. Often, this prolongs decision-making when multiple shareholders or investors are involved.
To learn all about the different legal structures, check out our detailed guide to legal entities and structures here. A sole proprietorship is a company without legal capacity that belongs to a single person. Freelancers and many other self-employed individuals legally operate a sole proprietorship. Liability: LLC members are protected from personal liability for the company`s debts and claims, a feature known as “limited liability.” When a limited liability company owes money or faces a lawsuit, only the assets of the company itself are at risk. Creditors may not access the personal property of LLC members except in cases of fraud or illegality. LLC members should exercise caution so as not to “penetrate the corporate veil,” which would expose members to personal liability.