Selecting the Right Legal Structure for Your Business

If you’re thinking about starting your own business, you’ll need to choose an appropriate legal structure. Far too many entrepreneurs neglect this otherwise critical step, resulting in higher taxes, more paperwork, and less protection of personal assets. Today, we’re going to take a closer look at some of the most common legal structures for businesses, including sole proprietorship, limited liability companies, and corporations.

Sole Proprietorship

A sole proprietorship is automatically created when a single individual sells a product or service to the public. There’s no paperwork required for creating this business structure, as the courts automatically view single-person businesses as sole proprietorships if they have not created a different legal structure. Sole proprietorships have minimal record-keeping requirements, making them a suitable choice for first-time business owners. The downside, however, is that the business owner’s personal assets are liable to lawsuit for business obligations.

Limited Liability Company

A step up from a sole proprietorship is a limited liability company (LLC). In terms of setup difficulty and ongoing record requirements, it falls somewhere between a sole proprietorship and a corporation. The owner of a LLC must file articles of organization with his or her state of business, as well as publish a public note of the LLC’s formation (usually done in a local newspaper). Unlike sole proprietorship, however, the owner of a LLC typically has his or her personal assets protected from business obligations. In other words, a customer or client cannot sue you for your personal assets — not without “piercing the corporate veil” at least.

Corporation

A third type of legal structure used in the creation of businesses is a corporation, which is the most difficult and time-consuming of the three structures mentioned here. While sole proprietorships and LLCs can be easily created without any legal or professional assistance, it’s recommended that entrepreneurs hire the services of a lawyer or certified personal assistant when forming a corporation.

Depending on the state, filing articles of incorporation may cost around $100 to $200. Corporations must also create bylaws, organizational resolutions, issue stock certificates and appoint a board of directors. Taxes are usually higher for corporations, unless the corporation is classified as an S-Corp. The owner and executives of a corporation also have their personal assets shielded from business obligations.

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