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How to Choose Your Business's Legal Structure
By Stephen Bucaro
One of the most important decisions you must make when starting a business is the
business's legal structure. The three most common business structures are sole
proprietorship, partnership, and corporation. Each form has its own characteristics and
legal status. The decision can be complex. Each has advantages and disadvantages for its
owners. Your choice depends upon how much of the company you want to keep control of, and
how much risk you can tolerate. If the business grows, it may be advantagous to change its
legal structure.
Sole Proprietorship
A sole proprietorship is the easiest business form to start. All you have to do to start
a sole proprietorship is to decide that you're in business. Of course, you'll need to obtain
any necessary local licenses, and you may want to open a separate checking account for
your business, but there are no complicated documents to create.
As a sole proprietor, you are completely in charge of your own business, you have no
partners or stock holders to account to. As a sole proprietor, your business is completely
private. Whether you're making good business decisions or if you’re making acceptable
profit is your own private business. Of course, you may want to reveal the details of your
business to a coach if you need the advise of an experienced business manager.
If you need a business loan, you'll need to provide financial information to your banker.
You'll need to provide financial information when you file your taxes, but you won't need
to prepare the complicated financial reports required for a corporation. If your sole
proprietorship makes a profit, those profits are taxed at your individual income tax rate,
not the higher corporate tax rates.
Although the profits made by your sole proprietorship are your profits, the debts incurred
by your business are your debts. If you go broke, your business doesn't declare
bankruptcy, leaving your private assets untouched, you declare bankruptcy, possibly losing
most of your private assets. If your business gets sued, the liability is your liability.
You might lose your business and your personal assets.
If you decide you start a sole proprietorship, make sure your customers sign disclaimer
and contract documentation that protects you and your business. Make sure you have the
proper amount of business insurance.
Partnership
There are several reasons why you might want to start a business with one or more
partners. You may not have all the talents and skills necessary for the business. Many
times a business will take on a partners or partners because the partners can provide
financial backing. Even if partners do not have the capital themselves, their knowledge
and experience contribution to the business may make it easier to obtain a business loan.
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