One of the most important decisions you can make when launching a startup or for-profit business involves its legal structure. Generally speaking, there are four legal structures that startup founders and new business owners can choose from. Each structure is associated with potential benefits and drawbacks. Although not every startup founder and business owner is going to view each “character trait” in the same way. Another company owner’s perceived drawback may be an advantage for your business model and vice versa. For example, you may loathe the idea of having to adhere to a strict managerial hierarchy integral to corporate structure while another startup founder may believe that this rigidity will allow their company to thrive in a competitive market.
Business Structure Options
The four main business structures are: sole proprietorships, partnerships, limited liability companies, and corporations. Sole proprietorships and most basic partnerships work in relatively the same ways. Some more complex partnership arrangements can function more like LLCs. However, both partnerships and sole partnerships generally function without a liability shield, are taxed on the personal income tax returns of the owners involved, and feature a very flexible management style.
By contrast, both LLCs and corporations are subject to more structured management hierarchies, may be taxed at the corporate level, and must abide by more significant reporting and compliance requirements. Given the restrictions inherent in these structures, you may be wondering why anyone would opt to form an LLC or a corporation as opposed to a sole proprietorship or partnership. One of the objectively beneficial features of both of these structures is that they offer their owners (LLC members and corporate shareholders) limited liability. This means that if the business is sued, incurs losses, or becomes subject to fines, the owners of LLCs and corporations generally can’t be held personally liable for any amounts owed. If you want to protect your personal wealth from business-related seizure, you’ll want to strongly consider forming an LLC or a corporation.
The Pros and Cons of Forming an LLC
Limited liability companies can be owned either by one or many members. This flexible structure allows self-employed individuals to form LLCs for the purposes of limiting their liability and broadening their tax options, as LLCs can choose to be taxed on the personal returns of their members or at the corporate level. The main potential drawback of forming an LLC is that they are generally subject to stricter registration, compliance, and reporting requirements than sole proprietorships and partnerships are. If you’re starting a smaller operation and have no interest in keeping track of legal paperwork but your business model could still benefit from an LLC structure, you may want to speak with a business attorney about how to manage the registration, reporting, and compliance side of things.
The Pros and Cons of Forming a Corporation
The corporate structure is distinct from the other three major business structures available to new startup and for-profit business founders. Corporations are required to honor strict managerial hierarchies as outlined by law. Additionally, corporations are legally owned by shareholders. If you’re interested in offering equity in your company via individual shares, structuring your business as a corporation is the only way you can achieve this goal. Offering shares can serve as an excellent way to finance expansion and innovation over time. However, many new business owners are understandably not interested in diluting control over their operations in this way. If a corporate structure intrigues you, you may benefit from speaking with an attorney about this option. If strict reporting requirements, issuing shares, and strict managerial hierarchies don’t fit your vision for your company, structuring your operations as an LLC may be your best bet.
Startup Assistance Is Available
If you’re in the process of launching a startup or dreaming of owning your own business, experienced guidance is available. Scheduling a consultation with a skilled business attorney at LawTrades will allow you to ask any questions you need answered. We look forward to learning about your business model and about how we can best serve your vision.