Starting a business requires prospective entrepreneurs to make hundreds of different decisions before opening their doors to customers˳ One of the most important decisions is selecting the right legal structure for your enterprise˳ The manner in which you choose to organize will impact your taxes, personal liability exposure, and fundraising options˳
Sole proprietorships are the most common arrangement for people who work alone˳ This structure is a popular choice because it is the easiest to arrange and does not require any filings with the state˳ One of the biggest disadvantages of the sole proprietorship, however, is that entity does not exist apart from the owner˳ Consequently, the owner is personally liable for all financial obligations and damages resulting from lawsuits filed against the company˳ Another disadvantage is that it can be difficult to raise capital˳ Banks are reluctant to make loans to sole proprietorships, leaving the owners to rely on home equity loans or borrowing from family˳
For enterprises with more than one owner, a partnership might be a good arrangement˳ Each partner contributes capital, labor, or expertise in order to turn a profit˳ The partners share in the profits, but like a sole proprietorship, they are also personally liable for debts and damages˳ One way in which partners can reduce personal exposure is by forming a limited partnership˳ This form consists of general partners who make decisions and assume the risks and limited partners with no control in the operations in exchange for reduced liability˳ Tax treatment is one of the main reasons this arrangement is selected˳ Profits and losses are passed through to the individual partners˳
Limited Liability Companies, or LLCs, are a type of structure that is becoming very popular˳ This structure creates an entity separate from the owners˳ As a result, the owners are not liable for debts or judgments against the venture˳ Unlike a limited partnership, all members are free to participate in the management and enjoy protection from personal liability˳ LLCs also enjoy pass through taxation˳ However, the tax rules for these structures are complicated˳ The amount of paperwork is a huge hurdle, and members must file articles of organization with the Secretary of State or sign an operating agreement˳
The right structure for your business depends on a number of different factors unique to your enterprise˳ For example, a small boutique selling handmade cat collars will obviously have less risk and perhaps less revenue than a company that provides window washing services to high-rise office buildings˳ Prospective entrepreneurs are advised to contact their attorney or accountant in order to discuss the taxation and liability consequences of the different entities˳ A number of free or low-cost resources to help you make your decision are available from your local chamber of commerce, Small Business Administration, or volunteers with the Service Corps of Retired Executives˳
Selecting the organization for your business is one of the most important decisions you and your partners will make˳ Research all of the available options and seek advice from experienced professionals before making your selection˳
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