Taking a business idea from concept to launch is both exciting and challenging. One of the principal choices you’ll make in this process is in the type of legal structure for your company. Your selection may be swayed by your particular industry, but there are also other things to consider. These include the various financial implications for business owners as well as liability issues, which should never be underestimated.
For these reasons alone, we always advocate that new business owners obtain appropriate legal advice before making business decisions about company structure. Speaking with a qualified business law attorney about your options for entity formation can help you understand your opportunities as well as the potential risks involved with selecting a particular legal structure.
What is a Business Legal Structure?
When you start your business, you will have to select an ownership structure for your company. This is the legally-recognized category of ownership for your business. Your choice will affect such things as taxes and liability. The basic ownership structures are a sole proprietorship, partnership, LLC, and corporation. Here is some basic information about each structure as well as the factors that may influence your decision.
- Sole This is the simplest form of business entity that works when there is one person responsible for all of the business decisions, profits, and debts.
- Partnership. This business entity is owned by more than one person. A partnership can be general, where everything is shared equally, or limited, where one partner has control of the business operations and others contribute financially.
- Limited Liability Corporation (LLC). An LLC is a hybrid business structure that allows the company’s owners to enjoy the various benefits of a partnership while also limiting their personal liability for the company’s debts.
- Corporation. By law, a corporation is a separate entity from its owners. There are several different types of corporations to choose from, the most common being a C corporation or an S corporation.
Factors to Consider When Choosing a Business Legal Structure
When you start a new business, deciding on its structure could be a challenge if your activities could fall into more than one of these categories. Since it can be difficult to change your legal structure down the road, it’s essential that you make the right choice upfront. Some of the factors that may influence that decision include:
- Complexity. The simplest legal structure is perhaps the sole proprietorship while the most complex are the various types of corporations. Even when you’ve taken complexities into account, there may be benefits to choosing one structure over another that make the additional red tape and paperwork worthwhile.
- Taxes. Taxes should be a primary consideration when selecting a business structure. There are two ways that taxes are treated with companies – where business owners pay taxes on their company’s profits or where profits are treated separately for the sake of taxes. Business owners of sole proprietorships, partnerships, and LLCs are required to report and pay taxes on all net profits from their business, even if that money is left in the business. Corporations, on the other hand, are separate tax entities and their owners only pay taxes on the profits that they take from the business in the form of salaries, bonuses, and dividends.
- Liability. Another primary consideration for your business structure should be liability. When you choose a sole proprietorship or partnership, you are personally liable for your company’s actions and debts. An LLC or corporation protects its owners from these liability issues by giving them legal separation.
- Control. How much control over your business you require may also influence your choice of legal structure. A sole proprietorship or LLC will likely give you the most control, while partnerships and corporations may require that you share control with others. There are some single entity business owners who choose an S-Corp as their business structure, which provides both control and the benefits related to having a corporation.
- Capital Investment. If you need access to outside funding sources, you should consider this in your decision. Many banks will not lend to a sole proprietor but will do so readily to a corporation. A corporation also has the ability to sell shares of stock to raise capital.
Speak with a Virginia Business Formation Attorney
Whether you’re just starting a new business, are a veteran business owner, or are considering changing your business structure to something more beneficial, you may benefit tremendously from legal assistance. The Virginia business law attorneys at St. John, Bowling, Lawrence & Quagliana help businesses throughout the Charlottesville area. We will guide you through your options, facilitate legal filings, and will help ensure that your business is structured for success. Contact us now at 434.296.7138 or online to schedule a consultation.