Maybe you are starting a business, or maybe you already have one. Either way, it is important to consider whether your legal structure fits your business needs. To help inform your decision, below is a brief summary of the four common legal structures, including the potential advantages and disadvantages of each.
This is, of course, the simplest structure. The upside is that it requires no paperwork to get off the ground (just a good business idea), and there are no formal rules to follow. The downside is that the business and the owner are one and the same. Therefore, the owner is responsible for all of the obligations, including debts and liabilities, of the business. In addition, any business income or losses are reflected on the owner’s personal tax return. Given the potential liability, a sole proprietorship is not recommended for businesses involved in risky activities.
A partnership is very similar to a sole proprietorship, with the exception that it has more than one owner (partners). Similarly, the partners pay taxes on their shares of the business income using their personal tax returns. It is important to note that each partner is personally liable for all of the business debts and claims, not just their share.
Limited Liability Company
As their name implies, LLCs offer one great advantage over sole proprietorships and partnerships—limited liability. This means that LLCs limit the owners’ personal liability for business debts and court judgments against the business and shield his or her personal assets. For that reason, LLCs make sense for owners who run risky businesses or have significant personal assets. However, LLCs are also more complicated and costly to operate. For instance, LLCs must be registered with the state, elect officers, and follow other formalities.
Like an LLC, a corporation is a distinct legal entity, separate from its owners. The corporation is the most complicated business structure, and it involves the most formalities and record keeping obligations. Like an LLC, forming a corporation requires forms and fees, and corporations are required to elect officers. These additional burdens, however, come with several advantages. Unlike all of the other structures described above, the tax obligations of the business are distinct, and owners of corporations pay taxes only on profits that they actually receive in the form of salaries, bonuses, and dividends.
How We Can Help
Finally, all businesses evolve over time. If you have already established your business using one legal structure, that decision is not set in stone. An experienced business lawyer can help you select a more appropriate structure and assist you in the conversion process.
If you want to select the best legal structure for your business, it is imperative to consult with an experienced business attorney. Bailey Law Firm can help you achieve your business goals, while also minimizing your liability. Contact us today to schedule a free consultation at 832.510.2900 or click here to contact us directly online. You can also visit our Business General Counsel page and Knowledge Center for additional information.