Business-people rightfully worry about this decision, because it is the first step in laying a solid foundation upon which a successful company can be built. A poor decision early in the game may backfire and ruin you financially. In the United States, however, there are a number of ways to set up and protect a business.
Deciding which legal structure your business will take is one of the first decisions you will make. Registering your company as a certain type of business gives both you and your business varying rights and liabilities in the eyes of the law. While choosing a legal structure for your business, you will have to balance advantages and disadvantages to both you personally and your business. The most significant differences between the six business forms are the manner in which you and your business will be viewed in matters of ownership, liability, and taxation. Another issue you may consider in your decision is manageability. Maintaining a sole proprietorship, for instance, is much easier and requires much less paperwork than maintaining a corporation. A simpler business structure also means less potential of running into legal pitfalls throughout your operation.
There is no correct business form that will fit everybody's needs, and there is no rigid formula that will make your decision easy or obvious. The nature, number of people involved, and projected size of your business will initially narrow the number of legal structure choices. As the founder of your enterprise, it is your task to study those legal structures and choose the one that best suits your needs. The legal structures differ primarily in matters of ownership, liability, and taxation. Consider the following questions as they apply to your proposed business:
- Are you and your dependents willing, and capable of accepting personal liability for all of your business's debts?
- Will you be the only person involved in handling the daily affairs of the business, or will others be routinely involved in the management of daily operations?
- How easy would it be for you to liquidate your business if you were suddenly unable to work?
- How difficult would it be to transfer ownership of your share of the new business to your heirs if you died?
- Does the nature of your business allow you to shut it down quickly if it is no longer capable of generating a profit?
- How much time are you willing to invest in researching legal aspects of running a certain type of business and filing the appropriate forms to do so?
- How much of your business's earnings do you expect to spend exclusively on developing your business further?
- How many people, if any, will be employed by the business?
- Does the nature of your business entail a high likelihood of being sued?
- Do you plan on giving your employees any form of compensation other than a salary or wage, such as fringe benefits?