When going into business for yourself or with a team of like-minded partners, the need for a proper legal structure to contain and cover the project is a matter of course. The type of entity formation you choose will have a major impact on the banking, legal, and governmental taxation aspects of your company.
Consider these common forms of business entities:
- Limited Liability Company (LLC): an LLC is technically not a corporation, but it does protect the owner(s) from liability. Usually, businesses with more than two individuals, or a two-person LLC, would commonly be registered as a Limited Liability Partnership (LLP). LLC’s can be formed with a minimum of one member and an unlimited maximum number of members.
- Sole Proprietor: as the name suggests, sole proprietorship is a type of entity used when the company is owned and run by one person. A sole proprietorship won’t can have employees but cannotsell shares, but it will provide an appropriate type of legal structure for a business that resembles self-employment or independent contracting.
- C Corporation: in addition to the small- and medium-sized legal structures reviewed above, there is a corporate formation called the C Corporation. It allows your business to grow larger, with consideration for employees, shares issuance, and various other components such as a board of directors.
- S Corporation: This is similar to a C Corporation, but it allows for a minimum of 1 shareholder to a maximum of 35 shareholders; and it eliminates a level of taxation.
This guide should serve as an excellent beginning point for anyone who is starting a business. Also, keep in mind that, over time, your business can transition between these legal structures, if need be. What you must understand is that there is a cost and a time consideration involved when transitioning between various corporate structures. Anything you can do in advance to understand what form your business with take, and at what scale, will surely save you time and cost in the long run.