Choosing a legal structure is mandatory when setting up your business because it regulates specific aspects of your enterprise. For instance, it determines your operational limits, the paperwork you'll have to file, your taxing options, and the amount of legal protection you can receive should your business face financial or other legal challenges.

Each legal structure has its pros and cons. Thus, selecting the most beneficial one for your business would be best. Below is a complete guide to help you understand business structures better.

Types Of Business Structures

There following are the different types of business legal structures, each with its merits and demerits:

1. Limited Liability Company (LLC)

LLCs don't need a lot of paperwork to form, which is a plus if you dread formalities like many other entrepreneurs do. One advantage of LLCs is the liability protection you can receive. You're not liable for all the debts the business incurs. In case of bankruptcy, your personal assets, like cars, land, or houses, won't be touched.

Additionally, LLCs eliminate the double taxation trap. As members of an LLC, you decide how the company is considered a taxable entity. You may be subject to federal taxation as either a partnership or a sole proprietorship, depending on whether your company is an LLC with multiple members or just one. Furthermore, you can borrow money to help fund your business under the company name without impacting your personal credit score.

You can also form LLC online quickly by following the process below:

• Look for a reliable firm to work with.
• Explain your business model, concept, product type, and the state you'll operate from.
• Identify the professionals who will file the paperwork on your behalf and register the business directly with the Secretary of State.
• Once the submitted documents are approved, you'll receive your completed LLC approval letter by mail.

Your filing process will be smooth if you work with trustworthy, experienced specialists who provide excellent customer service to their clients. You'll also save time and money by leveraging their vast experience instead of learning all the ropes from scratch.

2. Sole Proprietorship

A sole proprietorship is the simplest structure to form because you don't need to file much paperwork. Ideally, you're the sole owner of your business and in charge of daily operations. Your business earnings are taxed once as personal income. You also decide when you'd like to end your business since you don't have to depend on any members' decisions.

One of the disadvantages of this structure is that you have to take care of your debts, which means you won't have any liability protections. It's also difficult to attract investors because a sole proprietorship doesn't comprise the conventional buying and selling of stocks. Sourcing funds from banks can also be challenging because they may doubt your ability to repay, especially if your credit score isn't impressive.

3. Partnership

In this structure, you'll have to share ownership with other individuals. Everyone in the partnership will have an equal share in the business profits. You also share the burdens in the company. One advantage is that you won't have to pay taxes on the profits and losses, as they're passed through to the personal taxes of every member. Also, you won't incur many costs when setting up this structure.

Below are the two types of partnerships:

• Limited Partnership: Limited partners aren't involved in the daily running of the company. They're only investors. They also don't share similar liabilities as general partners.
• General Partnership: The partners run the company and take responsibility for the personal debt incurred or other obligations.

A partnership is an excellent option if you need to expand from a sole proprietorship. Choose a partner you can trust, and make sure you both sign a partnership agreement as insurance against potential future problems.

4. Corporations

A corporation is the most complex business structure since a lot of paperwork is involved.

There are different types of corporations, as outlined below:

• C Corp: This is a structure whereby every shareholder contributes cash and is given stock in the newly set-up enterprise. You'll be able to receive liability protection for your business and keep your assets. Moreover, your business can continue operations if you lose a member or someone transfers their share to another company. The business can also continue running even if you can no longer participate. Another advantage of a C Corp is that you can attract many investors to your company. However, the involvement of shareholders makes tax requirements a bit complicated. You risk facing double taxation because taxes are imposed on both corporate and individual income.
• S Corp: It's similar to the C Corp, only that in S Corp, all income and losses are passed through to shareholders and incorporated on their tax returns. It also enables you to add more shareholders to the business, meaning you can attract more investors.
• B Corp: It's known as a benefit corporation. You can set it up if your company is dedicated to a good mission. Even though it's for a social mission, you can still make profits to give back to the shareholders.
• Closed Corp: It's operated by a few shareholders and has liability protection. They have more flexibility compared to trade companies.

Generally, corporations are better suited for an enterprise that's already established, has many team members, and is ready to buy and sell shares. Raising funds is also easy with this type of structure.

5. Cooperative

It's a business owned and operated by the same people who provide its services. A selected board of directors run the business while other members have voting powers to control the administration of the cooperative. Profit gained is distributed among members. New members can join through buying shares. However, no matter how many shares they may hold, it doesn’t affect the weight of their vote in the running of the business.

Factors To Consider When Choosing The Right Business Legal Structure

It's essential to carefully look into each business structure to select the one best suited for your business. You could consider the following factors:

• Liability Protection: You can never know what your business may face. It's not uncommon to get into a lawsuit. Thus, selecting a structure that can give you liability protection is best.
• Funding: Selecting a structure that'll enable you to obtain funds quickly is crucial. For instance, corporations allow for buying and selling of shares, thus fast-tracking the funding process.
• Control: The sole proprietorship should be your go-to option if you'd like to run your business independently. On the other hand, corporations are typically run by a board of directors, and you can't make any decisions without consulting them.
• Taxes: With structures like C Corp, you risk facing double taxation because the business income is taxed separately from yours. But for a sole proprietorship, partnership, and S Corp, the business income is categorized as personal income; thus, you're taxed only once.
• Paperwork: Some structures, like corporations, require you to file a lot of paperwork, while others, like a sole proprietorship, require minimal paperwork.

All in all, every structure has its benefits. Only pick one that can enable your enterprise to grow and make profits.

Conclusion

Business legal structures vary, and each has its advantages and disadvantages. Whether you'd like to form an LLC, corporation, partnership, sole proprietorship, or cooperative, look into aspects like taxing, the ability to raise funds, filing of paperwork, and liability protection. And once you've settled on one, you may want to hire a professional to handle the formation process on your behalf and take the burden off your shoulders.