How to Choose the Best Legal Structure for Your Start-up
The decision of how to structure your start-up is extremely important. While there are multiple options, there is no one best legal structure for any specific type of business. However, there is a best choice based on your specific goals. In order to make your decision, you will need to consider 4 factors:
- Personal liability,
- Transferability, and
- Investor expectation.
The decision-making process can become difficult because these are many forms to choose from. Today, this article lists the most popular business structures.
- Sole Proprietorship– Essentially, this means one person owns the business. Everything is in one person’s name, and all payables are personal expenses. The advantage here is the owner answers to no one. Nevertheless, the owner is also personally responsible for all the business’ financial issues.
- Partnership– Much like a sole proprietorship, a general partnership is generally straightforward and easy to set up. Within a partnership, one can raise money by selling interest in the company. But, there is a potential personal liability if the business has financial problems. Additionally, tensions can form if there is a misunderstanding between partners.
- Limited partnership– A limited partnership is a version of the general partnership legal structure. In this situation, there are general partners, but an individual can also choose to invest in a limited partnership interest. Regardless, limited partners don’t have the same financial capability and their direct involvement in the business is limited.
- Limited liability companies (LLC)– This structure is more formal and provides some protection from financial liability by separating personal assets from the company’s debts. These types of business have members as opposed to partners. That said, the structure is highly adaptable and very popular with start-ups.
- Corporations– If you are a start-up seeking venture capital, this legal structure will make sense. Other advantages include separating personal assets from debts, taxes, and the legal structure. Regardless, it is more formal and requires conducting annual meetings. It is also a more expensive option, requiring more accounting and tax prep.
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