Starting a business comes with many underlying
sub-choices you’ll have to make. Some are not as stressful to get sorted out,
while others might take much more mental effort and thought process. One of
those decisions falling in the latter category relates to what legal structure
your business will have.
Choosing a legal structure precedes business registration, so this isn’t
something you can put off until later. Whatever legal structure you wind up
having affects matters like how much you’ll pay in taxes, who has sole
ownership and management over the business, who bears in the losses and shares
in the profits, and the paperwork that needs to be filed.
Consulting with business lawyers, accountants,
and counselors helps, but so is storing knowledge about legal structures. To
help you out, consider the following tips below.
1. Choose From Among
Different Business Structure Options
Suppose you’re unfamiliar yet with the
specifications of the different business structure options. In that case,
starting with a briefer on the various legal structures for businesses is a
good idea. Basic knowledge of those legal business structures helps you frame
your choice so you know exactly what each structure entails.
Here’s a brief run-down of each type:
·
Sole Proprietorship: As its name suggests, as the sole proprietor,
you are responsible for everything about your business, including the profits
and losses. A sole proprietorship is the most popular type of business
structure, given how easy it is to establish, especially for small business
owners.
·
Partnership: A business comprises two or more people who agree to share
ownership, profits, losses, and liability. In a general partnership, all
partners are involved in managing the business. On the other hand, in a limited
partnership, the limited partner has little to no involvement in managing the
business. Moreover, their liability is limited to the amount of their
investment.
·
Limited Liability Corporation (LLC): This is the best
business structure for those who intend to operate and run their business with
a small group of owners but still want liability protection. In an LLC, like Northwest LLC, for example, your
assets are protected from the business’s liabilities, should any arise.
·
Corporations: This is a legal structure for businesses run
and covered by an ‘articles of incorporation,’ also known as ‘charter.’ With
this type of business, there’s no limit to the number of investors and
investments.
The description above gives only a bird’s eye
view of those legal structures. It’s best to read more to learn about them and
know which suits your business.
2. Factor In The Start-Up
Cost
As with all other facets of your business, the
start-up cost is always a priority. Setting up a business entails more than
just printing business cards and other marketing paraphernalia, plus the
capitalization requirement. Now that you’re about to dig deeper into legal
structures, there are more expenses you’ll also have to consider.
For business owners, note that the more
complex your structure is, the higher the costs will also be. Entrepreneurs
must decide how much they can afford to invest depending on the business'
capitalization requirement.
Say your business requires quite a hefty sum
for capitalization, and you don’t have that amount. In this case, opting for a
partnership or corporation is a good idea. In doing so, you’ll have someone to
share the weight of the expenses with and any possible losses or challenges the
business will face.
3. Consider The Need For
Licenses, Regulation Compliance, And Permits
Businesses require necessary licenses,
permits, and regulatory compliance to operate. However,
these may vary depending on the nature of your business, business type, and
location.
If you have partners to share in the
investment and load, it’s worth going through the extra work of obtaining licenses and permits for a
partnership or corporation. This latter also applies with greater significance
to businesses with plans in the near future to expand overseas, where working with
investors and shareholders makes that growth more achievable.
4. Be Keen About The
Extent Of Liabilities You Can Cover
Starting a business is always a considerable
risk. If all goes well, then you’ll reap profits. But, if times are hard,
liabilities and losses come first before stability and profits kick in. Another
major deciding factor is the extent of liabilities you can cover. If such isn’t
something you’re confident about, it may be better to have partners or
investors with whom you can share the weight of the responsibility.
The Bottomline
Choosing the best legal structure for your business
is one decision with the most significant impact. It affects the reporting
requirements, your responsibilities and rights, legal obligations, and how
business funds are extracted. Because of its importance, getting this done
right can also be quite difficult. There are many things to factor in and
consider, but the tips above should be more than sufficient to get you started.
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