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An idea for a new business is exciting. It's also a nerve-wracking journey you need to be prepared for. You need to be sure the idea is a good one and that there's a market for it. There are also legal aspects to navigate, plus capital and funding considerations. Pulling it all together into a comprehensive business plan with set goals is a great way to bring the idea to life. Here you'll find articles, guides and tools to take you through the journey.
Deciding on a legal structure is one of the most critical choices you will make when starting your own business. This decision should be made only after consulting with legal counsel and your tax advisor.
When selecting the legal structure of your new business, there are several factors you need to consider.
The following is a summary of the various types of legal structures most commonly adopted by new businesses. Each business is unique, and we cannot recommend one over another for you. Only choose a legal structure after consulting your legal counsel and tax advisors.
This is the simplest type of business structure. Generally, the business is owned by one individual who also works in the business. If you do nothing in selecting a form of business structure, you automatically become a sole proprietorship under the law. Sole proprietorships are the most common form of legal structure for new businesses because of the ease and low cost in setting it up.
This is a good choice if your new business is going to be owned by more than one individual. With a general partnership, the owners manage the company and assume the legal responsibility for all of the partnership’s debts and legal risks.
Limited liability corporations are a hybrid business structure with characteristics from both partnerships and corporations. Like corporations, LLC offers the owners limited liability protections. However, they are similar to partnerships in that they do not require as much paperwork as a corporation. This is a common structure for consulting businesses such as accountants, attorneys, engineers, and financial advisors.
Using a C corporation as your corporate structure is more complex and expensive than other types of business structures. A C corporation is legally considered to be an independent entity that is separate from its individual owners. Because of this separate legal status, there are more regulations and taxation is more complex.
S corporations are similar to C corporations in that they shield the individual shareholder’s personal assets from the liabilities of the corporation.
The selection of your business structure is a complex decision that you should not make on your own. After reviewing the pros and cons of each option, we recommend that you consult your legal and tax advisors. Ready to take the next step? Check out the next resource in this series: “Preparing the One Page Lean Business Plan.”
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