Choosing a legal structure for your start-up is one of the most critical decisions you can make. It typically affects your taxation, corporate control, and legal liability. Each legally enforceable corporate structure comes with its own set of legal forms for conducting business, implying that you must meet specific standards for your business to stay compliant.
Below are some of the factors worth considering when it comes to deciding your company’s legal structure.
The type of start-up you intend to operate will significantly determine what type of legal structure you need to have, and the capital required. For example, sole proprietorships and general partnerships have the simplest legal systems, which have an affordable fee. On the other hand, corporations and limited partnerships often have a complex costly legal structure requiring an experienced lawyer to guide you.
A sole proprietorship is perfect if you want exclusive or principal control over your business. However, a corporation’s decision-making process or top management is usually slightly complex and not a one-man show. There is a board of directors who makes the company’s important decisions.
Corporations and limited liability companies have various legal requirements from the state and federal governments. When it comes to a single proprietorship, it involves a straightforward process that requires registration, records your profits, and paying personal income taxes. On the other hand, besides having a complex registration, partnerships also necessitate a formal agreement that spells out the duties and profit split for each party.
You may require a permit to operate in addition to officially registering your business entity. Depending on the business and its activity, local, state, and federal permits may be required.
When it comes to liability, a corporation carries the lowest level of personal culpability. In other words, it implies that creditors and consumers can sue the company, but they won’t seize the officials’ or shareholders’ assets. A limited liability company also provides the same level of protection as a sole proprietorship alongside giving tax benefits. Partnerships, however, divide liabilities among the partners according to the terms of their partnership agreement.
All profits are treated as personal income and taxed at the end of the year for most businesses. For example, individuals in a partnership can claim their share of the profits as personal income.
Each year, a corporation files its tax returns, paying taxes on profits after deducting wages. If you earn income from the corporation, you will have to pay personal taxes on your return, such as Social Security and Medicare.
Where do you see your start-up in the next five years? What kind of legal structure will allow it to expand the way you want it to? Review your business strategy and choose which system best fits your goal. Organizations should encourage the prospect of development and change rather than discouraging it.
Seeking a business legal structure entails contacting a business lawyer if you’re unsure which model is better suited for you. Alternatively, a workers compensation lawyer is a good option when you might deal with that entail compensation.