5 Reasons You Need to Choose Your Startup’s Legal Structure Carefully

Many people that start a new business do so as sole proprietors. That’s because it’s the cheapest and easiest route into entrepreneurship, and those individuals often run their businesses alone with little help from other people.

However, there can be times where thinking about your startup’s legal structure carefully can pay off. As you probably know, there are many legal structures you can potentially select for your business. Some are undoubtedly better than others.

If you were planning to set up as a sole proprietor, you might want to look at these reasons why considering a different legal structure could be a much better bet:

1. Credibility

There’s no denying that setting up a sole proprietorship business is the perfect fit for many people. But, it’s worth keeping in mind that if you wish to attract certain corporate clients, you may have more credibility approaching them as a company yourself.

Some businesses have strict rules about who they work with, and one of their pre-requisites could be they only want to deal with other companies or corporations due to the perceived higher credibility.

2. Tax Benefits

Let’s face it: no one wants to pay more taxes than they need to. You may not realize it, but there could be substantial tax benefits for your business if you decided to register its legal structure as a company instead of a sole proprietorship.

Did you know that if you choose a C-Corporation legal structure for your business, you could end up with double taxation? It’s where both the business and the owners get taxed separately. That’s why it pays to research and choose the right legal structure.

3. Asset Protection

When people start new businesses, they do so with high hopes that they’ll end up with successful, profitable enterprises. If that doesn’t happen, and your business owes money, you could be personally liable for those debts.

Choosing a legal structure like a corporation or LLP limits your personal liability in the business and thus protects your personal assets. What’s more, you may even find an LLP tax-efficient if you’re setting up a business with other people.

What exactly is an LLP? It stands for “Limited Liability Partnership” and, as the name suggests, boasts limited liability for each partner, much like a corporation.

4. Clearer Financial Information

When you start a new business as a sole proprietor, one issue you’re likely to encounter is creating a clear distinction between your personal finances and that of your business. If your business needs to borrow money, proving its income and expenditure can often be tricky.

Thankfully, you don’t have those issues when you choose a different legal structure. That’s because your business is a separate entity to yourself and has its own clearly defined financial information that is easy to check and verify.

5. Transferable Ownership

One final point to keep in mind is you can transfer ownership of your business with ease to someone else if you’ve incorporated it. That’s not such a walk in the park if you run your business as a sole proprietor.

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