Starting a new business is exciting. You’ve decided on the product or service you plan to provide and raised the funds you need to get started. However, one crucial decision remains: What kind of legal structure should you choose?
Various legal structures offer businesses different benefits and drawbacks in three main categories: taxes, liabilities, and registration requirements. Below, we discuss the advantages and disadvantages of the most common legal structures for new businesses.
Partnerships
Partnerships are generally less formal than other types of business entities. They are easy to form, making them a common choice for those who want to test out their business venture before fully committing.
Profits and losses of a partnership pass through to the partners, meaning each partner simply pays taxes for their share of income. But, partners are personally liable for the business’s debts. If the business is sued, the partners are also responsible for paying out any judgments ordered against the business.
Corporations
Traditional corporations, also known as C-Corps, offer the most liability protection for owners. The corporation itself is held liable for the business’s debts and any legal judgments levied against it.
But, corporations also fall under what many call “double taxation.” The company pays taxes on profits made, and individual owners/shareholders also pay taxes on their income. Corporations are also subject to more record-keeping and reporting requirements than other legal structures.
Limited liability companies (LLC’s)
Limited liability companies attempt to give business owners the best of both worlds: protection from liability without double taxation. The LLC structure protects the personal assets of its owners from liability. At the same time, profits and losses pass through to each member’s income.
However, members of an LLC are considered self-employed for the purposes of Social Security and Medicare, meaning they must pay taxes to those funds. Plus, some states only allow a company to operate as an LLC for a set period of time.
Finding the right structure for your business depends on how you wish to approach taxes, liability, and formalities. Be sure to discuss these factors with other leaders of your business as well as an experienced business law attorney.