The Ideal Type Of Legal Structure For Your Startup

most ideal type of legal structure startup business formation

Starting a business comes with endless decisions, and what legal entity you should choose is among them. There’s no single best choice when it comes to this. But the legal structure your company opts to operate under will have implications on your taxes, the amount of paperwork involved, personal liability, and access to financing. 

Many businesses, however, don’t realize the significance of legal structure in their company’s success and growth. When finding the best fit for your startup, consulting a lawyer or an accountant is the safest course of action. It wouldn’t hurt if you also put the time and effort into researching your options

Begin your search here as we give an overview of the different legal structures applicable to your startup company and some critical considerations for you to think about. 

Three Types Of Legal Business Structure 

There are various types of legal structures, depending on the type and scope of your startup. The most common forms of startup business formations, however, include the following: 

Sole Proprietorship 

This is the simplest and most popular structure to form a new business. In the US, 23 million businesses are owned by sole proprietors. As the only owner of the company, the individual has complete authority over all business decisions. There’s little paperwork involved since there are no partners or executive boards to answer to the owner. 

Choosing this structure means that every asset and profit generated by the business also belongs to you. While that sounds interesting, there’s no distinction between you and the business in a sole proprietorship. This means you’re also accountable for any debt, loss, and liability the company faces. 

Partnership 

Are you starting a business with a friend, business partner, or family? If you are, operating under the legal partnership structure can be one of your options. Depending on the type of partnership, this entity is owned and operated by two or more individuals. 

General partnership equally shares everything, from decision making and management to the distribution of assets, profits, and liabilities of the business. Meanwhile, in a limited partnership, one person controls the operations. In this legal structure, both partners are personally liable for the financial and legal obligations of the business, including the decisions and actions made by the other partner. 

Limited Liability Company 

Being held personally responsible for your company’s debts can be intimidating. However, with a limited liability company (LLC), you don’t have to worry about banks seizing your personal assets. The business and owners, generally called members, are recognized as separate entities under an LLC. 

Thus, there’s protection for company owners from personal liability for business debts and legal obligations. But take note that the advisability and benefits of forming an LLC can vary from one state to another. While some states allow a single-member LLC, others require at least two members. In Europe, England, and other countries it may be referred to as an Ltd. Before setting up this type of legal structure, it’s best if you will seek the advice of a legal professional. 

Start Your Business The Right Way 

Going for the right legal structure for your business can help you minimize any unnecessary and costly conversions in the future. But that doesn’t mean you won’t ever be able to change it if you need to incorporate and become a C or S corporation. The best company structure ultimately depends on your specific needs and circumstances. 

You can choose what you think is best for your business at this stage and make some changes later. But doing it yourself might be one mistake you don’t want to make, especially if you’re unsure what to go for. So ask for professional help as much as necessary while setting up your startup company properly.

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