When you start to create your business, you will want to register your business as a legal entity. A legal entity is a person, partnership or business that has legal rights. You want to register as a legal entity so you can enter your business into business agreements or contracts with partners or customers. You can sue or be sued, you can complete transactions, incur penalties or be held to obligations.
Using a legal entity instead of your first and last name can legally protect you from the downside of business deals that go wrong. If you are registered as an LLC (limited liability company) your business can be sued for its assets but your personal assets can not be taken.
Here are the different legal structures to consider for your business.
S-Corporation is under the protection of limited liability so personal assets are protected. They also have pass-through taxation so the owners only pay taxes one time on the profits from the company. An S-Corporation only has to file taxes once a year and the company can also seek and accept investment opportunities by selling shares of stocks. However this legal structure also has downside to it. You can only have a max of 100 shareholders.
The main difference with a C-Corporation is the C Corp is taxed twice. There are taxes on the business earnings and owners also have to pay individual taxes on earnings received from the stock ownership in the company. The C Corp also sells stock to shareholders in exchange for ownership in the company.
C Corps do have specific requirements such as holding at least one meeting a year for shareholders and directors. Keeping a voting record of the company’s directors. And a list of owners names and ownership percentages.
Limited Liability Company
A Limited Liability Company is great because like the S and C corp, your personal assets are protected. If there are debts for your company your personal assets cannot be included if you are sued.
Another benefit with LLC’s is you can have multiple members who own portions of the company. This helps when you are trying to create a larger business where there will be a group of people running the business. This is a great fit for business owners that want to build a team who owns a portion of the company.
A partnership is formed when two or more people want to join to start a business. There are two types of partnerships, a limited partnership and a limited liability partnership. Limited liability partnerships are for professionals that are forming a company with other people. The LLP will allow partners personal assets to be protected if one of the partners is sued. In this type of agreement the partners also share profits.
A sole proprietorship is a business that has only one owner. In a sole proprietorship the owner has total control of the company and is responsible for all the debts, liabilities and profits of the business. The assets of a sole proprietorship can be sold but the sole proprietorship cannot be sold to anyone else.
Sole proprietorships are good for one person businesses that are going to stay small. It is less hassle to maintain than the other types of legal structures which is a benefit when you are running a small business.
This type of business structure is good for individuals who are running a small business and do not mind taking on the liabilities or protecting their assets.