Selecting the Best Business Structure for Your Start-Up
If you are starting a business, you will need to consider the best business structure for your new venture. The business structure you choose will have a significant influence on your business, including day-to-day operations, taxes, and the extent to which your personal assets are at risk.
An experienced business attorney can explain your options, help you understand the different legal protections and benefits offered by each business entity, and help you choose the best business structure for your new venture. You should also work with a tax professional for advice on the tax implications of the business structure you select.
Types of Business Structures
The most common business structures include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each business structure has benefits and drawbacks. An experienced business attorney can explain the features of each and help you decide which one is best for your new business.
A sole proprietorship is the simplest form of business entity. A single person is responsible for the business’s profits and debts, and there is no separation between personal and business assets. The business owner’s personal assets are exposed to liability for debts incurred by the business due to a lawsuit, business creditors, or other claims against the business.
A partnership is owned by two or more people. You can set up your partnership as a general partnership, a limited partnership, a limited liability partnership, or a limited liability limited partnership. In a general partnership, decision-making, profits, and debts are shared equally between the partners. However, much like a sole proprietorship, the partners’ personal assets are exposed to liability.
In a limited partnership (LP), the general partner controls the day-to-day operations of the business and has unlimited liability for business debts. The limited partners do not participate in managing the business and are only liable up to the amount of their investment.
In a limited liability partnership (LLP), each partner can participate in the management of the business, and their liability is limited to the amount they invest in the business.
Finally, in a limited liability limited partnership (LLLP), the general partner handles day-to-day operations of the business and is liable for the business debts, but can limit the extent of their personal liability and transfer debts and obligations to an external insurer. The limited partners do not participate in the management of the business and are only liable up to the amount of their contributions.
Partnerships are commonly used in family businesses, or for people who are going into business with friends or business partners.
A corporation is a separate legal entity, distinct from its owners, and provides significant legal protection for business owners. The corporation has its own legal rights and can be sued, file lawsuits, own and sell property, and sell ownership rights in the form of stocks.
There are several different “types” of corporations, and the distinctions are largely related to how the corporation is taxed and the purpose of the business.
- A C-corporation is owned by shareholders. The corporation is taxed as a separate entity, and individual shareholders are also taxed on their income.
- S-corporations are similar to C-corporations but are able to make an election to avoid double taxation.
- A Closed corporation is owned by a few shareholders and is not publicly traded. They may be a C-corporation or an S-corporation.
- Open corporations are publicly traded on the stock market, and anyone who purchases stock can invest. Most publicly traded corporations are C-corporations.
- Nonprofit corporations exist to help others and receive tax-exempt status.
Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid business structure that allows business owners to limit their personal liability, but is generally a more modern and flexible entity than a corporation. Like corporations LLC’s can choose different ways to be taxed and may be closely held or publicly traded.
Factors to Consider When Choosing a Business Structure
If you are starting a new business, choosing the right business structure may seem difficult. An experienced business attorney can explain your options and help you choose the best business structure for your start-up.
When choosing a business structure, you will want to consider the following factors:
- Will the legal structure you choose allow your business to grow? Review your goals and objectives for the business and choose a business structure that best supports those goals.
- How difficult will it be to set up and manage the business? An experienced business lawyer will help you understand how the business structure you choose will affect day-to-day business operations.
- Certain business structures offer business owners additional protection against personal liability for business debts.
- The business structure you choose will affect how your report income and how you and the business are taxed. A good business attorney will work with your tax professional to help you understand the tax implications of the business structure you choose.
Fremstad Law: Business Lawyers Serving North Dakota and Minnesota
Choosing a business structure for a start-up is no easy task. The experienced business lawyers at Fremstad Law can provide advice on the best business structure for your new business. We will also work with your tax professional so you understand the legal and tax implications of the business structure you choose.
North Dakota business attorney Joel Fremstad has been practicing law since 1997. He has extensive experience in business law, business formation, employment law, and mergers and acquisitions. He enthusiastically represents North Dakota and Minnesota businesses and is proud to help business owners move forward.