Choosing a Legal Structure for Your Business
So you want to start a business, or maybe you’re already self-employed and your solo project is gaining some traction. Either way, it’s important to start thinking about which legal structure, or business entity, would make the most sense for you to establish. Whichever business entity you choose will determine which documents, if any, you’ll need to file with the state; whether you need to pay formation and ongoing fees to the state; how you’ll file taxes for your business; whether and how much you’ll be personally on the hook for your business’s debts and obligations; and more.
Types of Business Entities:
The five most common types of business entities are: (1) sole proprietorships, (2) partnerships, (3) limited liability companies, (4) corporations, and (5) cooperatives. This article will provide you with a broad overview of each common business type, including pros and cons. Of course, you’ll have to decide—either on your own or with the help of a business lawyer—which legal structure would be the most beneficial for your business.
I. Sole Proprietorships
Sole proprietorships are the easiest and cheapest way to start a small business on your own. Because sole proprietorships are unincorporated, you don’t have to file anything with the state or pay any government filing fees—you automatically own a sole proprietorship when you start conducting business. However, with this simplicity comes a big drawback: you, as the sole proprietor, have unlimited personal liability for the debts and obligations of your business.
II. General Partnerships
General partnerships are the easiest and cheapest way to start a business with one or more partners. Like sole proprietorships, general partnerships are unincorporated businesses, so you don’t have to file any documents or pay any fees to the government. Also like sole proprietorships, owners of the business have unlimited personal liability for the debts and obligations of the business. However, other types of partnerships can limit your personal liability.
III. Limited Liability Companies (LLCs)
LLCs provide a very popular legal structure for small to mid-sized businesses because they combine the tax benefits of sole proprietorships and partnerships with the limited liability of a corporation. Specifically, you only get taxed once, on the owner level; and owners enjoy limited personal liability because an LLC is a legal entity distinct from its owners. However, to get these legal benefits, you do have to register your business with the state and pay ongoing government fees.
Similar to LLCs, corporations are legal entities distinct from their owners, and thus provide limited personal liability for their owners. In fact, corporations are considered legal “persons,” and some types of corporations even have to pay their own income tax on profits. There are several different types of corporations including S corps, C corps, and non-profit organizations. Each type of corporation comes with a different set of pros and cons, as well as tax requirements.
Cooperatives are businesses owned by the people using their services, and are popular business models for community grocery stores, retail stores like REI, hospitals, art galleries, and restaurants. A cooperative’s profits are distributed among the user-owners, or members. Members of a cooperative typically have voting power to elect a board of directors, and the board of directors then runs the cooperative. Cooperatives can be organized as partnerships, LLCs, or corporations.
Which Legal Structure is Best for Your Business?
Given all the above options, it can be difficult to figure out which legal structure makes the most sense for your business. If you’re feeling overwhelmed, it might be helpful to start thinking about your business plan, i.e., how you’d like to run your business, as well as your most important business goals. Here are a few questions that you can ask yourself, to get started:
- What are you hoping to accomplish with your business?
- How many owners does your business have?
- Are you planning to have any investors?
- Do you have any employees, and if so, how many?
- How likely is it that you’ll be sued over a business dispute?
Once you really start thinking about your business plan and the day-to-day operations of your business, you should be able to get a better idea of which legal structure would make the most sense for it. However, please keep in mind that this article only provides a broad overview of a few different legal structures you can choose for your business. If you're not sure in which direction to take your business, it might be a good idea to contact a business lawyer. Best of luck with your exciting new business venture!
Res Nova Law is an intellectual property and business law firm based in beautiful Portland, Oregon, and serving both Oregon and Washington. We’re your go-to lawyers for startups and businesses of all types and sizes, in every stage of business growth. If you're interested in forming a business entity (such as an LLC, S Corp, non-profit, or more), we can help you file the requisite paperwork with the state, ensure you have all the right state and federal business licenses, make sure you're filing taxes correctly for your business, and much more.