How to Choose the Best Business Legal Structure
Asking yourself key questions will help you choose the best business legal structure for yourself. One of your first questions should be, “Do I have assets I need to protect?” Other questions could be:
- Could my product or service result in injury or damage?
- Do I want my business to continue to exist after my death?
- Is it worth the extra cost to establish a separate business entity in the form of a Corporation or an LLC?
- Am I willing to observe the formalities that a Corporation requires?
- Do I want the ownership of the business to be transferable without difficulty? And finally . . .
- Where can I find the best online legal documents to help walk me through the process of creating my business entity?
Sole Proprietorship or Partnership
For Internet entrepreneurs who have limited resources, ease and economy are often their criteria. If this is you, you’ll find the sole proprietorship or general partnership might suit you best when it is time to establish a legal entity. They are easy to form because neither requires any legal filings or costs. Also, you are entitled to all of the profits, and you’ll have full managerial control. A negative includes the fact that you are personally liable for all debts of your small business startup. This means that any non-exempt personal assets are at risk. And, the business ceases to exist upon your death or the death of a partner.
If you decide that a sole proprietorship is for you, you'll need to establish a DBA. Legal Zoom has the online legal documents you'll need to conduct your business under a trade name. They can also help you with a customized partnership agreement, if that is the route you are taking.
Corporation or LLC
Two other options when it is time to establish a business structure include: Corporation (C or S), and Limited Liability Company (LLC). If you have assets you want to protect, these business structures will help you do so.
Corporations offer tax savings, personal liability protection, and increased favorable conditions for raising money. Corporations are also required to perform certain official procedures such as holding yearly meetings and keeping detailed corporate minutes.
If you don’t live in the state where your corporation was formed, you’ll also need a registered agent to receive legal documents and state correspondence, and forward them to you. Legal Zoom can act in this capacity for you for $159 a year.
Limited Liability Companies (LLC), another business form, offer the same personal liability protection as a corporation; but they require less formality. For example they are not required to hold official meetings or keep detailed corporate proceedings.
LLCs also offer great tax flexibility. Members can choose to be taxed either as a traditional corporation or as a "pass-through" entity.
If you establish a business legal structure in the form of a Corporation or LLC, know that they can be challenging to form because of the expertise they require. If you are using online legal documents, you will want someone who can help you do it correctly . . . someone who can uncover your needs. I have found that Legal Zoom’s line of questioning clears up confusion and helps you make good choices. I’ve personally used them, and have been more than pleased!
I found myself confused and frustrated when I needed a registered agent after forming an out-of-state corporation. I had paid a tax accounting firm to help me form it . . . one that did not have my best interests at heart. And they continued to charge me high monthly fees to act as a registered agent. A friend turned me onto Legal Zoom, who took the time to answer my questions, and ended up saving me these monthly fees.
Your Business Entity and Taxes
When you establish a business legal structure, there are only 3 legal tax forms to choose from: Corp (either S or C), partnership or sole proprietorship. You can also operate as a Sub S corp. under the umbrella of an LLC, and it has advantages for both partnerships and sole proprietors. However, an LLC is a legal entity, not a tax entity.
If you are planning on creating a corporation as a business legal structure, I recommend that you speak with a local attorney or tax accountant first to find out which state provides the most advantageous tax situation for forming your legal structure. A C Corporation pays its own taxes as a business legal structure. But if you are the sole shareholder and employee, you will also be taxed as an individual. This is double taxation, a reason most solopreneurs form an LLC.
An LLC has favorable taxation rules because you save on unemployment taxes if you use it as the umbrella for an S Corp. There are no self-employment taxes under an S Corp. (These taxes are only applied to partnerships and sole proprietorships.) You are considered an employee of the S Corp., and Social Security and Medicare will be taken out of your wages. The way you can save on taxes is to split these costs between you as an individual and the corporation . . . with each paying one half. But again, check with your accountant about this.
Another step that helps establish your category as a business legal structure is by declaring on your 1040 whether you are a partnership, a Schedule C, an S Corp or a C Corp. And instead of choosing Inc or Partner, you choose LLC.
When you do your due diligence, you can rest easy . . . knowing you have done all you can to create the best business legal structure for YOU!
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