Choosing a Legal Structure: What You Need to Know

Liability and Business Legal Structure

Generally, entrepreneurs want to keep their personal assets and business assets separate to the fullest extent possible, meaning they don’t want to find themselves personally on the line in the event that someone decides to bring a lawsuit against a business. A business’s legal structure is a primary factor in determining how its affiliates can be held liable, and some types allow for more personal liability than others. For example, anyone who is particularly concerned about melding their personal and business assets probably doesn’t want to establish a sole proprietorship. There are, however, a number of legal structures that minimize owner liability, among them the limited liability corporation, the limited liability partnership and the limited partnership (also known as LLCs, LLPs and LPs respectively).

Corporations: An Overview

A corporation is a type of company that is headed up by shareholders. These shareholders have access to profits, but they aren’t personally or financially liable for the actions of the company. It is wise that anyone looking to establish this type of business create a shareholder buyout agreement at the outset to avoid problems down the line in the event a shareholder wants to break ties. Typically, corporations adhere to the rules laid out in corporate bylaws, which are usually created at the corporation’s inception. One of the drawbacks of creating a corporation is that the process involved in doing so is often more complicated than it is for other types of legal structures.

Partnerships: An Overview

While a partnership is typically free to establish and relatively quick and painless to create for businesses headed by two or more principle owners, they don’t particularly protect their members in terms of liability. This can prove problematic not only in the event that the business gets sued, but also in the event that the partners disagree on significant components of operating the business or otherwise find they do not work especially well together. Another drawback of the partnership arrangement is that the partners are responsible for paying personal income taxes on any profits netted by the partnership.

The Limited Liability Company: An Overview

As the name suggests, a limited liability company means that owners are protected from certain liabilities. For example, they cannot be held personally accountable for business debts as long as they create a separate bank account exclusively for use by the LLC. Exactly how to establish an LLC varies from state to state, but doing so generally requires completing paperwork and obtaining various business licenses. The exact process involved in establishing an LLC will depend, at least to some extent, on the nature of the business, but those looking to create this type of business should be aware that the process involved in doing so is typically more cumbersome than the process of establishing, say, a sole proprietorship or a partnership.

The Sole Proprietorship

Launching a sole proprietorship has benefits and downfalls. For people who enjoy working for themselves, it can be a great option. However, very little protection exists in terms of liability when it comes to the sole proprietorship, meaning the business owner typically can be held accountable for the businesses successes and failures.

Nonprofit Corporations: An Overview

Nonprofit organizations aren’t entirely unlike other common legal business structures, but one of the main benefits of nonprofit organizations is that they do not have to pay state or federal taxes. To qualify as a nonprofit, a company must do something for the greater good. Religious organizations, educational institutions and scientific research companies are all common examples of nonprofit companies. Furthermore, nonprofits are generally classified into one of two categories: the corporation or the unincorporated business. Each legal structure offers its own perks and downfalls, and the right type for each business owner depends on a number of variables. This content is intended to give today’s business owners the tools they need to make an informed decision on behalf of their own companies.