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Choosing the Right Legal Structure for Your Business

Entrepreneurship is exciting. After all, you get to innovate goods and services, connect with consumers, work with other passionate experts, and grow your dream business. However, it can also create a lot of stress. Launching a business can be scary, especially when growth is non-linear and rejection is surefire. Luckily, choosing the right business structure can help you succeed, grow, and flourish. Read on to learn about the legal structure options for your company.

Business Structure 101

A business’s legal structure is also called its “business entity.” It’s a government classification that regulates the way that your business operates. Your legal classification changes the way that your business will operate both in the big picture and day-to-day.

For example, your business structure will inform your federal tax burden and necessary legal fees. Sole proprietors and partnership owners will classify all income from their business as personal income. On the other hand, C Corporations will say that their business income is separate from personal income.

It also can determine liability frameworks on a state and local level. Some structures, like limited liability company (LLC) businesses, protect personal assets when sued. This is great, but federal governments don’t recognize or regulate LLCs, so they only truly exist at a state level.

Why Else Do You Need to Choose a Business Structure?

Choosing a business structure isn’t optional. If you don’t pick one, you won’t be able to register your business. This means you won’t get an EIN or any licenses and permits you need to conduct legal business.

Plus, you’ll need to regularly submit paperwork like tax forms and regulatory documents. The contents and structure of these forms depend on your business type. So, it’s critical that you pick a business structure before opening up shop so that you avoid illegal conduct, hefty fines, and dissolution.

Unfortunately, if you choose the wrong business structure upfront, you could be in for a lot of trouble down the line. Changing the structure later can be a really discombobulated and confusing process. You’ll have trouble with taxes and registration, and it can even lead to you unintentionally dissolving your business.

Sole Proprietorship Business Structure

About 73% of US businesses are sole proprietorships. This vast majority encompasses businesses that are owned by a single individual.

This business structure is extremely easy to set up. You have total control over all business decisions, and there’s less paperwork than other types of companies need to file upfront. Most of the time, you won’t even need to fill out any initial forms (or pay government fees!)

Sole proprietorships also have a straightforward financial structure. Your personal income tax return includes business expenses since that’s how you initially report earnings.

You can also use business losses to balance out earned income. Higher tax returns are pretty easy to get. You also won’t need to pay annual operating fees to the government, which saves a lot of long-term cash.

Note, though, that sole proprietorships make the individual owner liable for all financial obligations as well as giving them high earnings. You’ll be responsible for debt and losses. This makes the structure best for low-risk businesses like those run from home or retail venues.

Since you aren’t required to file government reports every year, you’ll also have a lot more privacy than other business types. You won’t need to disclose earnings and operations publicly.

Basically, if you plan to work alone, this structure can save time, money, and strife.

Limited Liability Partnership (LLP)

If you don’t plan to work alone, though, you may want to enter into a “partnership” structure. This is ideal for multi-owner companies because 2+ people can own and operate the business.

Having a partner is great because you can share company-related finances. The burden of overhead costs doesn’t fall on one individual. Plus, you can put your heads together to innovate more ways to grow your business with multiple perspectives.

This business structure looks a lot like a sole proprietorship. Startup is easy because there are n federal government forms to fill out. While you may need to file a few state forms, there won’t be many.

Tax structures will also be similar. Your business won’t pay income taxes. Profits and losses all go through each partner’s personal income tax returns.

Limited Liability Company (LLC)

LLCs are hybrid models that serve to limit all partners’ personal liability. They’re ideal for businesses that have medium or high-risk operations. They let you protect your personal assets, pay lower tax rates, and protect multiple partners from each other’s potential negligence.

This makes the LLC model common for doctors and lawyers. No one is personally responsible for debts and lawsuits. A corporate lawyer can help you if you run into issues, but they’ll protect your company rather than already-protected owners.

If your business fails, every partner’s personal assets are protected. This isn’t to say that you won’t lose money for business investments- you will. But there won’t be personal ramifications.

LLCs can also have as many shareholders as they want, and they can all participate in company operations. This makes for a much more flexible management structure.

Taxation also passes through the partner’s personal tax returns, They pay income on profits but are considered self-employed. This gives them tax credits and lets them not pay corporate taxes.

Corporation Business Structure

Whether you run a C Corporation or S Corporation, this type of business will be separate from you as an owner. It can sell stocks, sue other entities, be sued, and own its own property. The corporation is its own entity that you and others own.

Corporations have advantages like limited liability and continuity. They’re not affected by owner deaths or retirement. Because of their size, they can also earn a lot of capital.

No business starts out as a corporation, but you can grow into one over time.

Get Help With Fundamental Business Decisions

Now that you know the ins and outs of legal business structure, it’s time to begin making business decisions with the help of an expert. Florida attorneys can help you determine the right business structure to fit your needs. We’re committed to helping you execute your chosen framework seamlessly and effectively.

Schedule a business consultation today to start drafting legal contracts for your chosen business framework.

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