When starting a new business, choosing the right business structure is one of your most important decisions. What you select will have far-reaching implications for your company’s liability, taxes, ownership, and management.
But there are several different types of business structures to choose from, each with its own pros and cons that can affect your business in various ways. To help you determine which structure is best for you, we’ll examine the different types of business structures, what to consider, and how our business law attorneys can help.
Each business structure has unique characteristics, advantages, and drawbacks that can impact your company. Let’s take a closer look at the most common.
A sole proprietorship is the simplest business entity owned and operated by a single individual. As a sole proprietor, you have complete control over your company and bear personal liability for all business debts and obligations.
This duty means that your personal assets, like your home or savings, could be at risk if your business faces legal action or financial difficulties. From a tax perspective, sole proprietorship is straightforward, as you report business income and expenses on your individual tax return.
A partnership is a business owned by two or more individuals. There are two main types of partnerships: general partnerships and limited partnerships. All partners have equal management rights in a general partnership and bear personal liability for the business’s debts and obligations.
A limited partnership, on the other hand, has both general partners (who manage the business and have personal liability) and limited partners (who are typically investors with limited liability and no management authority). Partnerships should have a written partnership agreement in place outlining each partner’s roles, responsibilities, and profit-sharing arrangements.
From a tax standpoint, the partners pass through and report business income and losses on their individual tax returns.
An LLC is a hybrid business structure combining partnerships and corporations. LLC members enjoy limited liability protection, meaning the law shields their personal assets from business liabilities.
LLCs offer flexibility in management structure, allowing for member-managed or manager-managed setups. By default, LLC owners pass business income and losses to their individual tax returns. But they can elect to have the government tax the LLC as a corporation if it’s more advantageous for the business.
Corporations are separate legal entities owned by shareholders. There are two main types of corporations: C corporations and S corporations.
Corporations have stricter requirements for record-keeping, meetings, and reporting than other business structures.
When choosing a business structure, it’s important to consider factors like liability protection, taxes, ownership, management, formation costs, and potential for growth and funding.
One of the primary reasons to choose a formal business structure is to protect your personal assets from business liabilities. Sole proprietorships and general partnerships offer no personal liability protection, meaning the business owner’s assets could be at risk in case of a lawsuit or financial trouble. On the other hand, LLCs and corporations provide limited liability protection, shielding owners’ personal assets from business debts and obligations.
Your choice of business structure will have significant tax implications.
After selecting your business structure, consult a business law attorney to achieve state and local tax compliance.
Different business structures have different ownership and management arrangements.
A single individual owns and manages sole proprietorships, while partnerships involve shared ownership and management responsibilities among partners. LLCs offer flexibility in management structure, allowing for member-managed or manager-managed setups.
Corporations are owned by shareholders and managed by a board of directors and officers.
Consider your desired level of control, decision-making authority, and involvement in day-to-day operations when choosing a business structure.
The complexity and cost of forming a business entity vary depending on your chosen structure. Sole proprietorships and general partnerships have minimal formation requirements and costs, as they don’t require formal registration with the state.
LLCs and corporations, on the other hand, must go through a formal registration process and pay associated fees. Additionally, LLCs and corporations have ongoing compliance requirements, such as annual reports, meetings, and record-keeping, which can add to the overall cost and complexity of maintaining the business.
When selecting a business structure, it’s important to consider your company’s growth potential and future funding needs.
Sole proprietorships and partnerships may be suitable for small, closely-held businesses, but they can limit options for outside funding and make it difficult to bring on new owners.
LLCs and corporations, on the other hand, can more easily issue ownership shares to investors and raise capital for growth. A corporation may be the most suitable choice if you anticipate seeking venture capital, angel investments, or other significant funding sources.
Once you’ve chosen your business structure, formally establishing your business entity is the next step.
This process typically involves the following steps:
An experienced business formation attorney can guide you through the process, ensuring that you comply with all state and local requirements and set up your business for success from the start.
Having legal counsel by your side makes all the difference when choosing the correct business structure.
Our Wilmington, NC business law attorneys offer:
If you’re unsure about which business structure is right for your company, or if you need assistance with the formation process, the experienced attorneys at Johnson Legal, PLLC can help. Our team will work with you to evaluate your unique needs and goals, and guide you through establishing your business.
Don’t let the challenges of business formation hold you back – contact Johnson Legal, PLLC today to schedule a consultation and take the first step towards protecting and growing your company.
Shane T. Johnson is the CEO and Managing Partner of Johnson Legal, an estate planning and business law firm in Wilmington, NC. With years of experience in estate and business law, he has zealously represented clients in various legal matters, including small business formation and purchasing, estate planning, probate, domestic violence, and other legal cases.
Shane received his Juris Doctor from the University of Wyoming and is a member of the North Carolina Bar Association. He has received numerous accolades for her work, including being named among the Best Probate Lawyers in Wilmington by Expertise.com.
