Published On: Mon, Feb 18th, 2019

Understanding Legal Structure Before Starting Your Business


Photo by rawpixel from Pixabay

Starting a business takes a little more than an idea and some financial backing. There are a lot of legalities that go into the process of the beginning of a business, and this is often where people with great visions can fall down. So to help you avoid being that person, here is a breakdown of the four legal structures that you can start a company in and their benefits.

C-Corporation

You will have no doubt heard of corporations such as Microsoft and Google, but have you ever wondered what their setup is? If you haven’t, then you should be asking that questions; especially if you are starting your own business. A corporation is created under a legal structure that means it is separate from the owner, what that leads to is that the owner is not liable for debts and legal issues in the same way as other structures we are going to discuss. Instead of a single owner, a corporation has shareholders who are assigned roles (note: there can be a single shareholder who holds all of the roles.) The shareholders nominate the directors, who then nominate the officers who run the day-to-day operations.

S-Corporation

The main difference between a c and s-corporation is the ways they are taxed. The former is subjected to double taxation, once through the corporate level and again through personal income. However, an s-corporation can only be taxed through the personal income level because its shareholders have the income and losses divided between themselves.

But with that pro comes some cons such as a reduction in benefits and the ability to grow beyond 100 shareholders. That is why many new companies choose to start as an s-corp before switching to c-corp. You can switch between the two as many times as you like.

Photo by StartupStockPhotos from Pixabay

Limited Liability Company (LLC)

As with all of the legal structures, business taxes play a significant role in the formation of an LLC, in so far as an LLC is not taxed at the business level like a corporation. However, like a corporation an LLC is a separate legal entity to the owner of the business. That said in the same way that sole proprietor has profits and losses added to the owner’s personal tax returns so too does an LLC. A limited liability company has an operating agreement which sets out its financial and functional decisions. The reason for this document is that it outlines the ways the business shall be run which suits the specific needs of the owner. You might choose an LLC to have the protection of corporate liability without the formalities of setting up a corporation

Sole Proprietorship or DBA


Finally a DBA, which has been referenced above. This type of legal structure leaves the owner liable to all debts and legalities. Which might sound like a major con considering what we have discussed so far, but there are positives that come with this risk. One of the most highly regarded is the fact that you are in 100% control of your operations, which means you can run the business how you see fit – within the parameters of the law. There is also a simplified tax system for sole proprietorship that encourages a lot of first time business to go down this route.

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