As a small business owner, choosing the right legal structure for your business is crucial! The legal structure you choose will determine numerous things such as: the taxes you pay, the liability you face, and how you operate your business. There are many different legal structures available, and each has its own advantages and disadvantages. Here, we will go over the basics of the most common legal structures for small businesses and how to choose the right one for your business.
- Sole Proprietorship
A sole proprietorship is the simplest legal structure for a small business, but it provides NO legal protection. The the business is owned and operated by only one person. The owner is personally liable for ALL debts and obligations of the business. This means that if your business gets sued or goes bankrupt, your personal assets would be at risk. Sole proprietorships are taxed as individual income.
- Partnership
A partnership is a legal structure for a business owned by two or more people and, if formed correctly, can provide legal protection. In this structure, the partners share in the profits and losses of the business. Both are personally liable for all debts and obligations of the business. Partnerships can be either general or limited. In a general partnership, all partners are personally liable for the debts of the business. This means if you get sued, they can come after your personally including all your personal assets (OH no!). In a limited partnership though, both partners can limit their liability. Making a limited liability partnership can get complicated, and you should seek an attorney (such as us here at Bounds Law š to help you set it up.
- Limited Liability Company (LLC)
A Limited Liability Company (LLC) is the most popular structure for small businesses. It is a legal structure that combines the liability protection of a corporation with the tax benefits of a partnership (yay ā no coming after your personal assets!). In this structure, the owners are called members. LLCs protect the personal assets of members from business debts and obligations and are typically, but not always, taxed as individual income.
- Corporation
A corporation is a legal structure that is separate from its owners. The owners of a corporation are called shareholders. Corporations provide the greatest liability protection for its shareholders. However, corporations are subject to double taxation (ugh, taxes ā¹), meaning that profits are taxed at both the corporate and individual level.
When choosing a legal structure for your business, you will want to consider the following factors:
- Liability protection: How much protection do you need for your personal assets?
- Tax implications: What are the tax implications of each legal structure?
- Ownership: How many owners will your business have?
- Future growth: Do you plan on expanding your business in the future?
Choosing the right legal structure for your business is an important decision that should not be taken lightly. It is important to consult with an experienced small business attorney who can help you understand the advantages and disadvantages of each legal structure and help you choose the right one for your business.
At Bounds Law, our team of experienced attorneys can help you choose the right legal structure for your business and ensure that your business is properly set up and protected. Schedule a consultation HERE now and give your business a strong legal foundation.
