[This article was written by Anica Oaks.]
Creating your own business from scratch can be a big step forward in achieving your dreams. Once you get your product or service ready, it’s time to think about how you’re legally going to structure your business. The three most common entity structures include a corporation, LLC, and partnership.
When most people think of a business, a corporation is what’s in their mind. This is an entity that works to shield shareholders and owners from liabilities that are the company’s. From a tax standpoint, corporations are double-taxed. This means that the profits of the business are taxed on the corporate level and then, the dividends are taxed for the shareholders.
LLCs are a hybrid between the corporation and partnership entities. LLC stands for Limited Liability Corporation. They combine the best of both worlds and have become a popular choice for many startups. This type of structure protects the owners from having any liability for the limited liability corporation. In some rare instances, liability can be on the owner which you can learn about avoiding from your corporate lawyer.
From a tax perspective, this type of corporation has profits go directly to the member’s tax returns. This type of structure also works to eliminate the double-taxation that regular corporations see.
Partnerships and sole proprietorships are seen as pretty much the same thing. These are constructed by at least one person who is personally responsible for the company’s debts and litigation. The profits of this type of entity go directly to the business owner(s). This avoids the double-taxation that corporations and their shareholders have to pay.
Making the Decision
The decision about how you want to legally set up your startup is really in your hands. Note that going from a partnership to a corporation is easier than transitioning from a corporation to an LLC. Taking the time to weigh the pros and cons of each type of entity and how it will affect your business, your personal finances, and others involved is a must. Consulting an experienced lawyer can help you to determine what’s in your best future interests.
Deciding to move forward with your first startup company is a big decision. It may feel a little overwhelming at first but realize that all the beginning steps make a big foundation for the future. When it comes to selecting your legal entity type, there are various ways to go. The right entity structure is going to be situation dependent.
Freelance writer and web enthusiast