Small Business Formation Options

When an aspiring small business owner decides to “take the plunge” and start investing in their entrepreneurial vision, one of the first practical steps they must take involves choosing a legal formation structure for their new company. This decision is consequential, as it will influence everything from how that business is taxed to what kinds of legal protection – if any – the business owner will benefit from if their company is sued, falls deep into debt, or is cited for regulatory infractions.

Each state is empowered to regulate the businesses that operate within its borders in a number of different ways. Therefore, each state recognizes slightly different versions of major small business formation structures. With that said, there are generally four options that a new business owner can choose from.

Sole Proprietorships

Sole proprietorships are generally favored by single-owner companies that are operated locally, that run low-risk operations (legally and practically speaking), and that aren’t likely to expand significantly in the future. Many “gig economy” workers favor this structure, as it’s easy to set up, is subject to little oversight, and provides owners with total control over their operations. On the flip side, not all business owners want to be taxed on their personal returns – which sole proprietors are – and this structure doesn’t offer legal protection for an owner’s personal assets in the event that a company gets into trouble.

Partnerships

Most states recognize partnership structures that function much like sole proprietorships do, except that these companies are owned by two or more individuals/entities. With that said, some states do offer some limited legal protections for certain kinds of partnerships, so thoroughly exploring this option may be wise for small business owners who are looking to launch their enterprises with co-owners.

Corporations

Corporations are highly regulated and are subject to strict managerial hierarchies. Nevertheless, they are still favored by small business owners who hope to expand significantly, who want to raise funds in certain ways, and who want to benefit from maximum legal protection.

Limited Liability Companies (LLCs)

LLCs serve as hybrid structures, hovering somewhere between corporations and sole proprietorships/partnerships. These structures may be owned by one or many “members.” They may be taxed as pass-through entities on members’ tax returns or may be taxed as singular entities like corporations. Their managerial structures are relatively flexible and they aren’t highly regulated. They also offer personal liability protection in the event of legal and financial concern.

Making a Decision

As a dedicated lawyer can confirm, the legal structure of a small business venture is a consequential concern. As our friends at Cohen & Cohen know, this decision can even impact a company owner’s personal assets in the event that they are sued by a customer or a vendor who gets injured on company property. There are so many reasons why selecting a structure that meets a new company’s needs is important. As a result, aspiring business owners need to weigh their options carefully befor