What You Should Know Before Getting Started
Going into business requires not only the knowledge of your trade but the understanding of the laws on a local, state, and federal level. There are many reasons today for owner-managers of small businesses to look at the legal business structure of their firms. Altering laws and the need for capital are just two of the many factors which require owner-managers to carefully estimate which legal structures best meet their needs. This Business Builder will provide you with the information you need to help decide the best business structure for you.
What Are My Alternatives?
In order to wisely select the legal structure of your business, you must be well-informed about the alternatives from which you may choose. A business venture can be organised in several ways; however, the law classifies businesses so that most fall into one of three legal forms. The ones that are in this article are:
- Sole Proprietorship
- General Partnership
There are also variations on some of these basic legal forms — the S corporation, the limited partnership, and the limited liability company (LLC), a relatively new form of business organization, which has gained legal status in a majority of states.
There is no good or bad structure. The optimal choice depends exclusively on your individual situation.
Sole Proprietorship
The humblest (and least amount of bookkeeping) of any of the legal business structures is the Sole Proprietorship. To create a Sole Proprietorship, you will need a Good Idea, a lot of willpower, and an endless supply of energy for the hard work ahead. However, the only paperwork you’ll need is that required for filing a fictional name (if you decide not to use your own) and whatever authorisations you’ll need to begin your processes. You are not required to perform any formal action to set up a Sole Proprietorship. Consequently, there is no need to hire professionals to file required government documents to get you started. You do it all yourself!
General Partnership
You may decide to take on a partner because he has skills or expertise that you may lack. However, take special care in selecting an appropriate partner. Don’t select the first person that offers to make an investment in your company. A partnership is like a marriage in many ways; however, few take the time and effort to pick a partner that they would in choosing a spouse. Nevertheless, many a business has had to close its doors because the business unit did not work.
In many ways, the Partnership structure is very similar to the Sole Proprietorship. For instance, there is limitless accountability for partners and limited life of the business. Where it differs, however, is that you can share the work, financial weights, decision-making, and everything else that goes along with the business with a trusted colleague. If you’ve selected your Partners well, you can expect to reap synergistic benefits.
Limited Liability Companies
In addition to the few listed above of business structures discussed, many states have accepted a new type of entity called a limited liability company (LLC). An LLC is similar to and taxed as a Partnership, and it offers the benefit of limited liability like corporations and S corporations.
As in all other business structures, there are disadvantages to the LLC, because not all states have accepted a Limited Liability Company law, if you set up an LLC in one state which allows LLCs and you do business in another state, which does not, your LLC may not provide any Limited Liability Protection from creditors in that state. This is a severe risk and one you won’t face if your business is incorporated.
Ask yourself the following questions as assistance in defining what business structure may best suit your business plan.
- What would the life of the firm be if something happened to me?
- What are the costs and procedure in starting? Licenses?
- What is the ultimate goal and purpose of the business, and which legal structures can best serve its purpose?
- What is the size of the risk?
- What legal structure would insure the greatest adaptability of administration for the business?
- What are the possibilities for additional capital?
- What are the needs for and possibilities (if any) of attracting additional expertise?
- What is the influence of applicable laws?