It’s a reasonable question – but not easy to answer. Entire books have been written on the subject. I am going to give you a basic introduction with links to resources that will give you more information. You should meet with your attorney or accountant to make the final decision.
Selecting the legal structure of your business is a big deal but you can change the business structure whenever you think it is appropriate to do so. In other words, you can start out as a sole proprietor and change to LLC later. Things to consider when deciding the legal structure of your business include the start-up cost, cost of operations, taxes and liability.
Here’s an overview of the basic legal structures you can use for your business:
A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.
A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.
Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.
A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
The “owners” of a LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.
Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.
A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs.
Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.
My jewelry business is a sole proprietorship and I am leaning that way for the consulting business. I plan to find and meet with a business attorney soon.
Next time we’ll discuss writing a business plan.
[Photo Credit: howtostart-acleaningbusiness.com]