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Choosing a Legal Structure for Your Startup: What are the Options?

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The legal structure you choose for your business is ultimately going to shape your journey. Because it’s so important, choosing the right one is imperative.

There are several different types of entities and each one has both pros and cons. The decision you ultimately make is going to impact the way you operate your business. In fact, the business entity selected is going to touch virtually everything – from who controls the company to liability, taxes and more.

The key to determining what structure provides the most advantages for your business is learning about each one. Keep reading to learn more about the most popular options available.

The Sole Proprietorship

Simple and straightforward, a sole proprietorship is a very popular option. With this type of organization, there’s one person responsible for all of the business’s debts and profits.

This is for individuals who want to be their own boss and run a business out of their home, without having to worry about having a physical storefront. With this business entity type, you are in total control.

Keep in mind: this entity doesn’t offer protection or separation of your professional and personal assets. In the long run, this could become problematic if your business begins to grow, and there are more aspects that you are liable for.

The Partnership

With this business organization option, two or more people are owners. There are two basic types of partnerships:

  • The general partnership: Everything is shared equally.
  • The limited partnership: One partner is in control of the operational aspects and the other contributes and receives a portion of the profits.

Partnerships have dual status as a limited liability partnership and a sole proprietorship. This is determined by the entity’s liability and funding structure.

Partnerships are the right option for those who have plans to start a business with a business partner, friend, or family member. When this option is selected, partners can share the losses, as well as the profits, make decisions together for the business and more. It’s important to remember that with this type of entity, you are liable for all decisions made, even if they were made by the business partner.

A Limited Liability Company (LLC)

Have you ever wondered what is an llc? If so, here’s the answer.

The LLC offers a unique, hybrid type of structure. When this is selected, everyone involved with the business (shareholders, partners, and owners) have limited liabilities. This is all while they enjoy the benefits of partnerships regarding taxes and flexibility. With an LLC, a member is protected from any type of personal liability for business debts, as long as it’s not able to be proven they offered in an irresponsible, unethical or illegal manner.

The limited liability company offers additional separations and protections for businesses, beyond what is offered by a sole proprietorship. It’s also a combo of a partnership and corporation. With this, you won’t have to worry about the mixing of your personal and company assets. They are separated, and any profits or even losses you incur aren’t taxed at the corporate level.

Corporation

According to the law, a corporation is an entity that’s completely separate from the owners. It has unique, legal rights and is independent from the owners. A corporation can be sued, it can sue others, sell stock and sell or own property.

There are several types of corporations, C, B, and S corporations, closed corporations, and nonprofit corporations.

As you can see, there are more than a few options to choose from when deciding on a legal entity and structure for your startup business. Consider carefully, as the one you choose is going to impact your business in several ways. In some cases, reaching out for assistance from the professionals will be beneficial in making this important decision.

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