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Understanding the Legal Implications of Your Business Structure

Running your own business as an entrepreneur can be an exciting and fulfilling venture. At the same time, the prospect of being your own boss can feel rife with challenges and confusion, and even scary because of legal complexities. Therefore, in order to ensure that the longevity of your business is protected while your individual liabilities are minimized, it’s necessary to do your due diligence about varied business structures and figure out which one is right for you. 

A Comprehensive Guide to Business Structures

When making a decision about the structure of your business, consider these options: Sole Proprietorships, Partnerships, Limited Liability Companies (LLCs), and Corporations. 

Each business structure comes with varied pros and cons–and have different legal implications that can impact operations, liabilities, taxation, and long-term growth. In this guide, we will explore all four and provide you with the knowledge you need to make a well-informed choice. 

What is a Sole Proprietorship?

A popular choice among freelancers and solopreneurs, a Sole Proprietorship is an unincorporated business that is owned and operated by a single person. Ultimately, the business and the owner are one and the same and there is no veil of separation between the personal and the professional. This means that all business debts, losses, and liabilities are the singular responsibility of the business owner. 

Some pros associated with Sole Proprietorships include:

Of course, there are also some disadvantages, including:

What is a Partnership?

This is a legal arrangement where two or more individuals run a business and share operational responsibilities, ownership, and profits. Additionally, they also share joint responsibility over potential losses, liabilities, and debt. Partnerships are common when there are multiple people invested in a company.

A Partnership carries the following advantages:

And here are the cons:

What is an LLC?

Likely one of the most popular business structures for entrepreneurial and small businesses, an LLC brings together aspects associated with both Partnerships and Corporations. One of the major perks associated with an LLC is that the business structure protects the company’s owners, which are called Members, and professional liabilities remain separate from personal ones. 

Another noteworthy point is that LLCs are created by state statute, so the process of how to form an LLC in New York might be vastly different from launching one in California. It’s best to learn the individual requirements of your state to figure out if this structure is the best fit for you. 

The LLC format also comes with other advantages, including:

There are some cons to be aware of as well:

It’s also key to note that there are some particular factors to be aware of when registering an LLC, which again, vary by state. Generally speaking, the registration process involves:

What is a Corporation?

The last business structure to discuss is the Corporation. A Corporation is governed by a Board of Directors and ownership in such an entity is determined by the selling of ownership shares. The Corporation business structure is best for larger businesses, companies seeking to scale, or when investment via stock offering is being sought out. 

Some pros associated with Corporations include:

Alternatively, here are the cons:

What Business Structure is Best For You?

As you move forward with launching a new business, it’s necessary to assess your own situation and your individual comfort levels with overall risk. Make sure you think about your goals related to:

Ultimately, many entrepreneurs and small business owners opt for the LLC format because of the benefits of the structure… not only to current operations but also achieving long-term business goals. As you get started, make sure you surround yourself with trusted partners and advisors, including attorneys and business consultants who have the ability to understand your objectives and steer you in the right direction. 

Author Bio

Amanda E. Clark  is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing.

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