Starting a Business? What to Know About Choosing a Legal Entity

Starting a Business? What to Know About Choosing a Legal Entity
May 26, 2019 Meghan Belnap
In Business

Many people’s dream is to become an entrepreneur. Despite the difficulty inherent in starting your own business, many people have become rich off of their endeavors. However, starting a business is in no way a simple process. There are a lot of complexities involved, and some of them can be confusing. One of these is choosing the legal structure of your business. Below is an overview of some of the most popular choices.

Sole Proprietorship

The simplest and easiest to understand legal structure a business can take is the sole proprietorship. In this business structure, all the power is vested in one person, the business owner. That owner gets to control the business as he or she sees fit. The downside, however, is that owner is also liable for all the debt the business accrues overtime as well as any other financial obligations. 

Partnership

The second legal structure you may want to consider for your business is a partnership. As one might expect, a partnership is a business venture shared by two owners. Both partners share in the profits as well as the liabilities of the company. In certain cases, one partner may be held responsible for the actions of the other partner. Both partners pay their own self-employment taxes based on their incomes from the business.

Limited Liability Company

A third option you may want to consider is an LLC. LLC is short for Limited Liability Company. LLCs were designed to help solve the problem of owners or partners of small to medium-sized businesses being held liable for those business’s financial obligations. LLCs can be set up so they are similar in structure to partnerships. However, with LLCs, the owners are referred to as members.

Corporation

Lastly, you could choose to found a corporation. This is the most complex business organization you can choose. As you may know, the owners of the business, in this case, are the shareholders. Whether or not the losses of a business are passed onto the shareholders depends on the structure of the corporation and the state it exists in. One big benefit of a corporation is that it is a completely separate legal entity from the owners. It, in fact, pays its own income taxes.

Overall, it can sometimes be difficult to figure out the legal structure of your company on your own if you don’t have a strong understanding of business law. This is why you may want to obtain business transaction law services to help you choose the right legal entity and found your business in a manner that will be best for you and your company.

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