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4 Helpful Tips To Select The Best Legal Structure For Your Business

4 Helpful Tips To Select The Best Legal Structure For Your Business
The Siliconreview
22 Febuary, 2023

Starting a business comes with many underlying sub-choices you’ll have to make. Some are not as stressful to get sorted out, while others might take much more mental effort and thought process. One of those decisions falling in the latter category relates to what legal structure your business will have. 

Choosing a legal structure precedes business registration, so this isn’t something you can put off until later. Whatever legal structure you wind up having affects matters like how much you’ll pay in taxes, who has sole ownership and management over the business, who bears in the losses and shares in the profits, and the paperwork that needs to be filed.

Consulting with business lawyers, accountants, and counselors helps, but so is storing knowledge about legal structures. To help you out, consider the following tips below. 

  1. Choose From Among Different Business Structure Options

Suppose you’re unfamiliar yet with the specifications of the different business structure options. In that case, starting with a briefer on the various legal structures for businesses is a good idea. Basic knowledge of those legal business structures helps you frame your choice so you know exactly what each structure entails. 

Here’s a brief run-down of each type:

  • Sole Proprietorship: As its name suggests, as the sole proprietor, you are responsible for everything about your business, including the profits and losses. A sole proprietorship is the most popular type of business structure, given how easy it is to establish, especially for small business owners.
  • Partnership: A business comprises two or more people who agree to share ownership, profits, losses, and liability. In a general partnership, all partners are involved in managing the business. On the other hand, in a limited partnership, the limited partner has little to no involvement in managing the business. Moreover, their liability is limited to the amount of their investment.
  • Limited Liability Corporation (LLC): This is the best business structure for those who intend to operate and run their business with a small group of owners but still want liability protection. In an LLC, like Northwest LLC, for example, your assets are protected from the business’s liabilities, should any arise.
  • Corporations: This is a legal structure for businesses run and covered by an ‘articles of incorporation,’ also known as ‘charter.’ With this type of business, there’s no limit to the number of investors and investments.

The description above gives only a bird’s eye view of those legal structures. It’s best to read more to learn about them and know which suits your business. 

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  1. Factor In The Start-Up Cost

As with all other facets of your business, the start-up cost is always a priority. Setting up a business entails more than just printing business cards and other marketing paraphernalia, plus the capitalization requirement. Now that you’re about to dig deeper into legal structures, there are more expenses you’ll also have to consider.

For business owners, note that the more complex your structure is, the higher the costs will also be. Entrepreneurs must decide how much they can afford to invest depending on the business' capitalization requirement. 

Say your business requires quite a hefty sum for capitalization, and you don’t have that amount. In this case, opting for a partnership or corporation is a good idea. In doing so, you’ll have someone to share the weight of the expenses with and any possible losses or challenges the business will face. 

  1. Consider The Need For Licenses, Regulation Compliance, And Permits

Businesses require necessary licenses, permits, and regulatory compliance to operate. However, these may vary depending on the nature of your business, business type, and location. 

If you have partners to share in the investment and load, it’s worth going through the extra work of obtaining licenses and permits for a partnership or corporation. This latter also applies with greater significance to businesses with plans in the near future to expand overseas, where working with investors and shareholders makes that growth more achievable.

  1. Be Keen About The Extent Of Liabilities You Can Cover

Starting a business is always a considerable risk. If all goes well, then you’ll reap profits. But, if times are hard, liabilities and losses come first before stability and profits kick in. Another major deciding factor is the extent of liabilities you can cover. If such isn’t something you’re confident about, it may be better to have partners or investors with whom you can share the weight of the responsibility. 

The Bottomline

Choosing the best legal structure for your business is one decision with the most significant impact. It affects the reporting requirements, your responsibilities and rights, legal obligations, and how business funds are extracted. Because of its importance, getting this done right can also be quite difficult. There are many things to factor in and consider, but the tips above should be more than sufficient to get you started.