When you’re the founder of a startup, it can feel like a whirlwind of getting your products launched, building your business and hiring employees, but there’s something that is also just as important to keep in mind, and that’s the legal structure of your business.
Choosing the right structure for a new business and taking the necessary steps is essential for success. Without doing this, if you hit any type of challenge regarding taxes or legality, it might spell the end of your startup.
The following are some things to know about the process and some of the specifics of structuring a new business.
If you’re the sole owner of your business, you may be tempted to go the route of a sole proprietorship, primarily because it tends to be the simplest business structure. What to know here, however, is that while it may be easy and inexpensive to create this, and you will get the lowest tax rates of any of the business structures, this also means you’re personally liable for your business debts. When it’s time to raise funding for your startup, this may also be a challenge, because you won’t be seen as having a lot of credibility in terms of repayment.
Also, if you were to die, this means your business would as well.
You might still opt for a sole proprietorship if you don’t have employees, and you don’t have a lot of assets to protect, but as you grow, you will likely have to change your structure.
Another structural option to be aware of is the partnership. In a partnership, you have the possibility of a limited or general structure.
In a general partnership, creditors may go after all of the partners, or any partner, while in a limited partnership, the general partner has unlimited personal liability. The limited partners’ liability is then limited to what they’ve invested in the company.
This is also a low-cost option, and there can be tax advantages, but it can also be risky because if one partner leads to the downfall of the business, the general partner may be personally responsible.
LLC stands for a limited liability company. It’s structured much like a partnership, and the members are deemed the owners. If you structure your startup as an LLC, you report your income or loss on your personal tax returns, or you may opt to be taxed as a corporation.
Some of the advantages of forming an LLC include the fact that it will likely be easier to raise funding, and the liability of this type of business can’t be more than what’s invested in the company. It’s also an easier process than setting up an S corporation, but you will have to pay self-employment taxes on your net income.
Also, depending on the state where you’re launching your startup, if you have a partner who leaves, that can mean the business must be dissolved.
These aren’t all of the potential legal structures of business, but they are three of the most common for startups. There’s no right answer for everyone, so it’s important to seek professional guidance and make the right choice for you personally as well as your business.