Choosing the Optimal Legal Structure for Your Business
Factors Involved in Business Formation
When you establish a new business enterprise, you have a number of options with respect to legal structure. The ultimate decision depends on several factors.
Ownership Structure
Determine the number of owners you anticipate having, as well as their roles and involvement in the daily operations of the business. If you expect to run the business by yourself, you can set up a sole proprietorship, a limited liability company (LLC), or a corporation. If you expect to have more than one owner, you can also consider a partnership. A sole proprietorship or partnership will give more flexibility but might also expose you to greater personal liability for the obligations of the business. An LLC can be a good compromise, with a high level of flexibility and protection for your personal assets.
How You Will Finance the Business
If you’ll need outside investors to create and build the business, you may want to consider a partnership or corporation. With a corporation, you can sell shares, either privately or in a public offering. If you plan to obtain a bank loan to form and build your business, you may find banks more willing to work with a limited liability company or partnership.
Potential Risks and Liabilities
What are the potential risks associated with the business, and to what extent do you want or need to protect yourself from them? If the risks are minimal, a partnership or sole proprietorship may be fine. However, if there are significant risks, a corporation or LLC can limit your liability to the amount of your investment in the company—creditors won’t have access to your personal net worth.
The Ease of Establishing and Maintaining the Legal Entity
As a general rule, creating a sole proprietorship or a partnership is one of the easiest and least expensive ways to set up a business. With a sole proprietorship, you may need a business license, depending on where you operate, but that’s about all you’ll need. With a partnership, you can create and execute a partnership agreement, but it’s not required. Corporations and LLCs, however, require formal documents to be filed with the state and involve annual filings and meeting requirements.
Tax Concerns
If you set up a sole proprietorship, partnership, or LLC, any income from the company will “pass through” and be reported on your personal income tax return. With a corporation, you only pay taxes on profits received as salary, bonus, or dividends. However, with certain types of corporations, you also pay tax at both the corporate level and on any distributions from the corporation.
Contact MCIS Law
At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to startup and existing businesses in southeast Texas. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We are currently communicating with clients by phone, text message, or videoconference. We accept all major credit cards.
