As you work to start your business, you probably have a lot of questions. High on that list of questions should be what legal business structure is right for me? The structure you choose will have lasting implications and impact your company's level of tax liability, personal liabilities, ability to raise funds, and the amount of paperwork needed to file in order to start this business.
Before you register your business with the state of Utah, you need to decide which structure best fits your company's needs. The most common business structures are:
In order to choose which is best for your company, consult with an experienced business attorney from the state that you live in. They can help you choose the right business structure, and ensure that all paperwork is filed correctly so that your company is compliant with state laws from the start.
A Sole proprietorship is the most simple business structure and is the easiest to form. If you do not register your company with another business structure then it is automatically a sole proprietorship. This means that business assets and liabilities are not separated from the owners personal assets and liabilities. This type of business structure can be a good idea for low-risk businesses and business owners who want to try running a business but are unsure if it is something they wish to keep pursuing.
The main disadvantage of a sole proprietorship is the lack of separation of business and personal assets and liabilities means that your personal assets can be garnished to pay your business debts. In addition, banks are sometimes hesitant to lend to sole proprietorships which can hinder your businesses growth.
A partnership is a business structure where two or more people have ownership over the business. You can set up a limited partnership or a limited liability partnership.
In a limited partnership, one partner has unlimited liability, but also has the most control over the business. The other partner has limited liability, but also limited control over the business.
In a limited liability partnership (LLP) both partners have limited liability which protects all partners from having personal assets used to pay business debts.
Another option is to form a corporation. A corporation is a separate legal entity from you or any other owners. There are several different times including C-Corps, S-Corps, B-Corps, and nonprofits. In each case, the owner or owners are not personally liable for corporate liabilities. Corporations offer the most protection from personal liability, but they are often the most expensive as they require extensive bookkeeping and pay the most in taxes. However, it is often easier to raise funds with a corporation through the sale of stocks.
Forming and running a corporation is more complex than other business structures because they require extensive record keeping and reporting. If your company needs to raise money or if you plan on eventually selling your business, a corporation may be a better option for you. Because of this it is important to think about your short and long term business goals before creating your business.
A limited liability corporation or LLC is one of the most common business structures. The primary benefit of an LLC is that it protects you from personal liability. Your personal assets are protected in the event that your company is bankrupt or sued, so long as corporate formalities are observed.
Another benefit of an LLC is a lower tax rate than if you had formed a corporation. However, the owner of an LLC is considered self-employed and must pay self-employment tax. Still to many the self-employment tax rate is more favorable than the corporate tax rate which makes an LLC a desirable option for many small businesses.
Before choosing what business structure is right for your company, it is best to consult with an experienced business attorney who can advise and assist in the legal processes necessary to creating your business. Reach out to the experienced attorneys at Sumsion Business Law today to schedule a consultation and get your business started.