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How to Choose the Legal Structure of a Business

How to Choose the Legal Structure of a Business

Around 84% of small business owners say they’re feeling optimistic about their business’s future. Knowing how to choose the legal structure of a business will boost your confidence even more.

What is a business structure? It’s a business’s organizational foundation. A company’s business structure determines its taxes, legal status, and more.

The four main kinds of business structures out there are the partnership, LLC (Limited Liability Company), corporation, and sole proprietorship. Choosing the right structure will help your business flourish to new levels of success.

Keep reading for solid advice on choosing a business structure.

Consider Your Business Plan

Always choose a business structure based on your business plan. Your business’s costs and risks should factor into what business structure you choose.

Think about your startup costs. If you’re a simple freelancer with a small budget, you’re a sole proprietor by default. It’s a worthwhile investment to upgrade to an LLC.

Choosing a corporate structure wins over investors more than the other structures do. That’s part of why corporations receive more outside funding. However, corporations have the most complicated and expensive business structure.

Partnerships pose a risk because they involve another business owner in the equation. How the other party behaves in your business relationship could make or break your business’s success.

Taxes

LLC and sole proprietors pay the same taxes. All profits count as personal income and get taxed each year accordingly. Again, you’ll have to pay filing fees to get an LLC structure’s protection.

However, choosing an LLC structure helps you avoid double taxation. Double taxation refers to a single income getting by two or more jurisdictions. Learning how long it takes to form an LLC in your state will prevent it from happening.

In a partnership, each party claims a portion of their taxes as personal income. Meanwhile, corporations file their own annual tax returns and pay taxes on their profits after expenses. If you pay yourself out of your own corporation’s payroll, you’ll owe taxes for your personal income, Medicare, Social Security, etc. 

Legal Liability and Protection

As a legal business structure, sole proprietorships offer the least legal protection. If someone sues you or you file for bankruptcy, you’re fully liable for the expenses as a sole proprietor.

An LLC structure protects your personal assets. If you file for bankruptcy or go through a lawsuit, you’re not personally liable with an LLC in most cases.

Usually, only one partner in a partnership has unlimited liability. The other partners’ liability is limited. Limited liability partnerships make every partner’s liability limited.

A corporation is its own legal entity. It makes profits, pays taxes, and retains liability. As such, it offers the strongest legal protection out of all the types of business structures available.

The Legal Structure of a Business Makes a Difference

Filing the articles for an LLC costs anywhere between $40 to $500. Always check your state’s guidelines before picking the legal structure of a business.

You’ll also have to choose a name for your LLC. Always make sure a business name is currently available before registering it as an LLC.

Think big—check out our business articles. It’ll inspire you to start the dream business you’ve always wanted.



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