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One of the very first things you are going to do in your startup planning is deciding which business structure is going to be best for you. Each of the legal structures for your business will have different tax requirements and will offer you different levels of protection. To start with, you are going to look at what your future business goals are, and take into consideration the laws in your country or state.
Once your company is on the road to success, and you can see growth - you can choose to change the legal structure. Discussing your options with a business lawyer is one of the first things you should do. That simple conversation will bring clarity to the issue, and see you on the right path from the start.
Informal Business Structures
If you are a freelancer, or a solo/two-person small business then you might choose to have an informal business structure. Always keep in mind that these don’t offer protection when it comes to personal liability, and they also don’t have taxation benefits. The two types of information structures for your business are:
General partnerships: more than one person owns the business, but it isn't a formal organization. Taxes will be filed under the partners' names, and if anything should happen, all the partners are liable.
Sole proprietorship: a single person will own this business; they are responsible for their taxes and personally liable if anything happens to the company.
If your business is low risk, these are a great option, and you intend to stay a freelancer.
Formal Business Structures
If you want to maximize your tax benefits, have personal liability protection, and enjoy increased credibility, a formal business structure is ideal.
LCC: A Limited Liability Company, LLC, is owned by its members and is one of the simplest formations to protect personal assets. There are also great tax benefits from having an LLC.
Corporation: Shareholders own a corporation, which is a formal legal corporate organization. Personal liability protection is provided by a corporation, which is more complicated than an LLC. When you need to attract outside investors, forming a corporation is beneficial.
If you are looking for a formal structure that offers simplicity, the LLC is the best option. It provides a significant amount of protection and can still be attractive to investors. If you have an idea of the business you want to run, you probably know the machinery, staffing, or premises you need. Those will be some of the deciding factors. Corporations are known to be more challenging to maintain, partly because most small businesses don’t make enough for it to be sensible to pay high corporate taxes.
Most often, the decision comes down to do you want to have personal liability protection? While there are business insurances that you can (and should) keep protected, having extra layers from your business structure is invaluable.
Are you wondering who can help you, and at which stage of your business? 5 Professionals to Work with as a Business Owner — Breakfast Leadership Network