Choosing The Right Legal Structure For Your Business
One of the critical things in starting your business is ensuring that you get the legal requirements right. It only takes a small amount of research and possibly a discussion or two with an expert in the field, and the benefits aren’t just that you will fall on the right side of the law. Here we are going to take a look at some of the options you can choose to register your business under and their pros.
Sole Proprietor (or DBA)
One of the core principles of setting up as a sole proprietor is that the owner is liable for all of the company’s debts and legalities. While that can put some people off, the reason someone might opt for a DBA is to ensure they have complete control over the business. In addition to running your company in the way you see fit, you will also have a simplified tax system to follow compared to the other structures we are going to look at below. That is why a lot of first time business owners choose to go down the sole proprietor route.
Corporation (C & S)
A corporation can be split into two different types, C and S. The common themes between the two types of corporation is the structure within which they operate. For starters, they are separate to their owner, therefore the person who starts the business is not liable for its debts or legalities. Corporations can also sell shares to raise funds for the business and those shareholders are divide up the roles of the companies as follows:
- Shareholders nominate directors
- Directors employ officers
- Officers manage the business on a day-to-day basis
Where an S corporation differs from a c-corp is in the benefits and the tax system. A c-corp is under the rule of double taxation which means it is taxed at personal and corporate level, whereas an s-corp is not. However, an s-corp can only have up to 100 shareholders and none from outside of the US. Due to the fact that you can switch between the two corporations, you will often find smaller companies register as an s-corp before switching to a c-corp after a certain level of success.
Limited Liability Company (LLC)
Much like a corporation, an LLC offers the owner the opportunity to be a separate legal entity to the business. This means the business will be taxed in a different way to a sole proprietor. However, an LLC can have its profits and losses added to the owner’s personal tax returns. In these ways, an LLC is almost a hybrid of the different types of structures that we have outlined above.
There are some key differences to the formation of an LLC to the other types that we have already looked at, the main one is to do with the structure. An LLC uses an operating agreement to determine its financial and functional decisions, based on the desires of the owner. One of the reasons you might choose an LLC is to have the protection of corporate liability without the formalities of setting up a corporation. However, one thing you should research before committing to this structure are the LLC fees that you will need to pay to set up in your state.
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