If you’re looking to set up a business, it’s in your best interest to know what the most economically friendly legal structure for your potential company should be. The Houston Chronicle notes that up to 627,000 new businesses open every year. Depending on which state your business opens in, different tax laws will apply to your company. Starting up a single-owner company doesn’t have to be excessively complicated. Here we’ll cover the most common types of business entities to figure which startup legal structure suits your needs the best.
Sole Proprietorship
A sole proprietorship is one of the most common types of business structures. Legally, a single person is responsible for all the business’s decisions and debts. However, the thing that makes a sole proprietorship questionable is that there’s no separation between your assets and the business’s assets. They may become a problem as the business grows, making you liable for paying more taxes to the state. It’s easy to set up and a low-cost solution for most individuals who have a small business. You can also move to dissolve your business at any time, without any formal paperwork needed to do so.
Partnership
In a partnership, there are usually two or more people running a single organization. A general partnership shares up the responsibilities and liabilities of the business between all parties equally. On the other hand, a limited partnership has distributed responsibilities, with one or more individuals running the company and the others contributing in some way, either financially or through their skills or knowledge. If you enter into a partnership, you’ll be held responsible for all your decisions and the decisions your partner makes. This startup legal structure is relatively easy to form and gives you a lot of growth potential.
Limited Liability Company
This startup legal structure is one of the most popular in recent years because of the protections that it offers to individuals. The limited liability partnership or LLC was created to enable owners to get the protections that corporations enjoy while still collecting income and paying taxes as an individual. The cost of forming an LLC, as well as the amount of paperwork you need to do to register the company, varies from state to state. Some states have agencies dedicated to helping business owners record their LLC and even acting as their legal agent in-state.
Choosing a Proper Legal Structure
Knowing what type of business structure suits your business comes from examining what your business aims to do. What sort of growth potential does it have? Where will it be in five years from now? All of these inform you if you should go with something simple like a sole proprietorship, or something complex like an LLC because of its benefits. It’s possible to convert to a different business structure in the future. However, the US Small Business Association notes that there may be some limitations on which startup legal structure you can switch to based on the locale. The choice of a structure will impact the company’s operations for the rest of its existence.
