When starting a business, there’s an abundance of factors entrepreneurs need to consider. But none can be more crucial to the success or failure of a business than choosing the right legal structure — corporation, LLC, partnership, or sole proprietorship. From privacy issues to personal liability, taxes, costs, state and local laws, and a host of other issues, the legal structure you choose for your business can impact your top and bottom lines as well as how you operate. Here’s what you need to consider when figuring out which structure works best for you and your business.
Privacy: For many small business owners privacy is a major concern. According to Findlaw.com, a corporation must provide much more information to the state than businesses with other legal setups, and this information becomes public record. Sole proprietorships and partnerships don’t require the owner to give up so much information and offer more privacy.
Short term vs. long term: “When you’re starting out, what you want to do is spend as little money as possible while you test your product or service,†says Alice Bredin, small business adviser to American Express Open. Since most companies evolve within the first six months to a year, says Bredin, it’s important to look at what structure will best fit the business during that time period. “As your needs evolve your business structure can change over time.â€
Tax implications: Understanding the tax obligations of the legal structure you choose is important. Sole proprietorships, partnerships, and L.L.C.s are known as “pass-through†entities because all profits and
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