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How To Choose A Legal Structure For Your Business

by: Jody Ehrhardt

Whether you are starting a small business from your home or opening a new, large operation, you will need to decide which business structure is better suited to you and your company's needs. There are four basic types of business structures: sole-proprietorships, partnerships, corporations and limited liabilities companies. The type of structure you choose will be determined by the type of business you own, the size of the business and many other individual actors. To make the best choice it is usually necessary to seek the advice of a lawyer that specializes in business law.

Before consulting a lawyer, however, it is a good idea to understand your options. The first option, sole-proprietorship, can only be used by an individual that is the only owner of the company. The only exception to this rule is if the owners are husband and wife. In a sole-proprietorship there is one very distinctive advantage and one equally distinctive disadvantage. The advantage to this structure is that there is no legal requirement necessary to form it. This means that you can create a sole-proprietorship for little if any cost and maintain it without further paperwork or legal filings. The disadvantage to this structure is that the individual that forms the sole-proprietorship is solely responsible for any debts incurred by the business. For example, if a customer were to sue your company, your personal assets could be used to pay off any judgment against your business.

In a partnership two separate individuals must own the business and the individuals must choose not to incorporate. As with a sole-proprietorship, no legal filings are required to establish this business structure but it is highly recommended that you at the very least draft an agreement between all parties involved. This document or contract can be drawn up by the partners but it is more advantageous to have a lawyer that specializes in business law draw it up for you. If you choose to draw up the contract yourself, be sure to include information regarding the financial responsibilities of each partner, the terms for the sharing of profits and losses and the responsibilities in decision making for each partner.

If you are thinking about choosing a corporation as your business structure it is important to know that each state sets forth its own requirements for the formation of a corporation. For details about these requirements it is best to consult a lawyer.

The advantage to organizing a corporation is that the liability for the company is limited to only what an individual puts into the company. This means that each individual owner does not have to worry about his or her personal finances or assets seized to pay off company debt.

The disadvantage to owning a corporation is the time it takes to maintain one. In a corporation, the company must elect a board of directors, write articles of incorporation and issue stock. Owners must also attend shareholder meetings and follow all corporate guidelines while running the business. Unless you own a large company with multiple employees, a corporation is usually not necessary.

Perhaps the best business structure is a limited liability company. This structure includes the advantages of each structure while minimizing the disadvantages. For example, in a limited liability company, the owners are not held personally responsible for company debt yet they are still able to run their company without issuing stock or holding corporate meetings. The biggest disadvantage is that there are legal requirements needed to create a limited liability company and an attorney must do the paperwork necessary to create one.

As with all legal agreements, there are many complex issues to keep in mind when making a decision. No matter which type of business structure you are likely to choose, it is best to consult a lawyer for advice on which structure with offer your company the best tax situation while still allowing protection for your assets.

About the author:
Jody Ehrhardt write for a website where you can find a lawyer in your city or state, including Trade lawyers and Tax lawyers

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