You may have a great product or service idea for your business, but have you thought about what you need to do to establish a solid legal foundation for your new endeavor? The idea gets customers in the door, but it’s the legal structure that sets you up for long-term success.
The Importance of Choosing the Right Business Structure
Choosing an organizational structure for your business is more than just a legal formality. Your business structure affects:
- How much you’ll owe in taxes
- Whether or not you must share profits with other parties
- What paperwork you’ll need to complete
- How easy it will be to raise funds from investors
- If your personal assets could be at risk due to litigation or business debt
- If the business can be transferred to others after your death or when you no longer wish to be involved in its operation
Common Types of Business Structures
Each business structure offers unique advantages and disadvantages. For example:
This is the simplest type of business structure. One person owns the business and controls its operations. Tax reporting is straightforward, and you do not need to file annual reports with state or federal governments. However, your personal assets can be at risk.
In a general partnership, the partners have equal roles in owning and operating the company as well as liability for its debts and other financial obligations. Buyout and non-compete agreements are strongly recommended for each partner to ensure the stability of the business if one person wishes to leave the partnership.
In a limited partnership, there are general partners who hold the same role they do in a general partnership and limited partners who serve as investors only. As with a general partnership, this type of business is more expensive to maintain than a sole proprietorship due to the added legal and accounting services required.
C corporations allow the owners or shareholders to be taxed separately from the entity. Personal liability is limited, but these businesses are legally required to hold annual meetings and have a board of directors that is voted on by shareholders.
S corporations provide the liability protection of a corporation along with added tax benefits, but they can’t have more than 100 shareholders. Shareholders must be U.S. citizens, but they are not personally liable for business debts or liabilities and can sell their shares without tax consequences.
Limited liability company
A limited liability company (LLC) is often referred to as a hybrid structure because it gives you a chance to take advantage of beneficial aspects of both partnerships and corporations. This structure is often recommended for a medium- or high-risk business where the owner (or owners) wants to protect their personal assets or pay a lower tax rate than what is associated with a corporation.
How an Attorney Can Help
A sole proprietorship is the most common type of business in the United States. While this type of business structure doesn’t necessarily require an attorney’s assistance to form, it’s often in your best interest to schedule a meeting to go over your goals and ensure you’re picking a structure that fits your needs. It is easier and cheaper to form the correct business type in the beginning than is to fix the consequences that can result from choosing an inappropriate legal structure.
Consulting an attorney can also help you come up with a plan to mitigate the potential disadvantages of the structure you’re considering. For example, your attorney might recommend insurance to protect your personal assets that could be at risk in a sole proprietorship or partnership or have suggestions for how to determine if the added recordkeeping requirements of a limited partnership are worth the benefit of attracting passive investors.
At Alperin Law, business planning is one of the many services we provide. Our goal is to help your business operate smoothly, keep your assets and profits protected, and minimize the possibility of future litigation. We work with entrepreneurs in all industries to lay the legal groundwork for a successful endeavor.
Our Business Law Attorneys Can Help You With the Future of Your Business
If you have questions about the legal issues associated with running a successful business, our experienced business law attorney can help. Please contact us online, or call our Virginia Beach office. We also have offices throughout Virginia, including Chesapeake, Newport News, Norfolk, and Suffolk.