Starting your own business, thrilling as it is, is not for the faint of heart. One of the more intimidating parts of the process is figuring out which legal structure will be the most beneficial for your new company. While you should always consult a reputable business law attorney before making any final decisions, it is also wise to have a basic understanding of the options beforehand. Here is what you need to know about each potential structure.
A sole proprietorship is the default structure when new businesses are not registered any other way. As a sole proprietor, you will claim the business’s revenue as income on your personal tax return because the business will not be considered a separate entity. On the downside, this structure leaves you personally liable for your business’s debts. It also makes finding investors for startup funding difficult because you can’t sell company stock. On the upside, however, sole proprietorships are the most straightforward business structure to set up and manage. Typically, they work best for solo operations like freelance artists and writers, lawn care professionals, part-time tax preparers, and the like.
A partnership allows two or more people to own a business together. Depending on the details of your partnership agreement, one person might take on more liability for the company, but in exchange may also have more control over its operations than the other partners do. To avoid conflict and disruption, the partnership agreement should clearly identify each partner’s responsibilities. Under a partnership structure, each partner files the company’s profits on their personal tax returns. Many companies start as a partnership to test their ideas before moving on to a more complex type of entity once the business begins to grow.
A limited liability company does what its name suggests: it limits the liability taken on by the business owner(s). This structure protects owners of moderate to high-risk companies who want to safeguard their personal assets in the case of litigation. Also, an LLC is a “pass through” entity, which means that each member of the LLC claims the company’s profits and losses on their personal tax returns.
In a cooperative, a company’s workers, and sometimes its customers, own the business. Any profits made by the company are distributed amongst the co-op’s members. Most cooperatives utilize a board of directors and officers that operate the business on behalf of the members, with more important decisions being put to a general vote among all members. Members secure their place as owners in the company by purchasing shares. Owning more shares does not mean greater voting power; in a co-op, all member’s votes are equal.
Corporations differ from other business structures in that they operate as independent entities. Corporations file their own tax returns and hold all legal liability for the company. They can sell stock, making it easier to raise funds by offering shares in return for investments. They also require much more stringent record-keeping and reporting practices. Several types of corporations are available to owners, including non-profits, C, D, and S corporations. Your attorney can help you settle on the right type of corporation for your business and industry.
If you would like professional guidance on choosing a structure for your new business, Ogborn Mihm Quaintance, PLLC can help. These experienced business law attorneys have the skills to create a custom plan designed for the success of your unique company. Contact us online or call (605) 339-1000 to get started today.
