Own Your Stuff: Here Are The Most Common Types Of Legal Business Structures
Clark Atlanta University alumna and founder of the wildly popular vegan food chain chain Slutty Vegan Pinky Cole made waves on the web when she announced the gifting of each 2022 graduate a limited liability company, or LLC, during their commencement ceremony last month.
“Every single graduate in this audience will leave this stadium as a business owner,” she said.
If this doesn’t sound like a big deal to you, think again.
An LLC is a legal business structure that protects your personal assets (your home, car, and personal bank accounts) in the event your company is litigated against. It can cost hundreds of dollars to file depending on the state you’re filing in.
The filing process isn’t difficult, but it’s important to understand whether which business structure makes most sense for your company. There are lots of questions around starting a business—we’ve rounded some expert answers to help you determine your path.
What are the different business structures?
In an interview with Entrepreneur.com, Mark Kalish, co-owner and vice president of EnviroTech Coating Systems Inc. said “each situation I’ve been involved with has been different. You can’t just make an assumption that one form is better than another.”
There are various business structures that’s important to take a look at before the filing process takes places.
A sole proprietorship, the most common form of business organization, allows complete control to be allocated to the founder of the company. Conversely, the owner is also responsible for all financial obligations of the business.
A partnership, on the other hand, describes the involvement of two or more people who agree to share in the financial gains and losses of the business. The biggest advantage to a partnership is sharing the brunt of the tax burden.
Lastly, a corporation is described as a stand-alone legal entity that solely handles the responsibilities of the company. Like an individual person, the corporation is liable for paying taxes, as well as responsible for any litigative action taken against them. The key benefit of corporate status is the avoidance of personal liability.
A hybrid form of the partnership business structure is the limited liability company (LLC), which allows the founder to take advantage of the other business formats.
How do I determine which business structure I should file for?
Now that you’ve gained an understanding of the various business structures, it’s important to determine which makes the most sense for your business.
USC Gould School of Law Professor Michael Chasalow says this can only be determined by asking yourself the right questions. For more than a decade, he’s led the law school’s Small Business Clinic, which provides pro bono legal services to small businesses in the state of California, one of the most litigious states in the country.
“How many people are going to own the entity,” he asked in an interview with USC’s newspaper. He said this is imperative because that determines the level of responsibility for the business. “Conversely, if you have multiple people, you have to go to the next question, which is, ‘Are they all being treated the same way,’” he said.
He also said that he often asks questions that gets clients deeply thinking about their true goals when launching a business.
“I try to get a sense of the likely trajectory of the business,” he shared with USC. One of the questions he said he asks is, “If this is successful — not ‘win the lottery’ successful, but if this business achieves what you want it to — how much money will it make?”
He explained that some people aim to make hundreds of thousands of dollars a year, while others want millions out the gate. “Some want it to be like Google. Those different goals push us in different directions.”
He says once the assessment is made, the next step is to make filing.
An LLC or S-corp filing usually costs a few hundred dollars depending on your state, but he still advises leaning on an expert to properly complete the process as it can be complicated to navigate down the line.
“Operating a business comes with several costs,” he told USC. “If the business can’t afford those costs, it might mean — painful as it is — that the entrepreneur needs to reevaluate the underlying business itself.”
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