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What is the Best Legal Structure for My New Business?

Knowledgeable SCORE advisors offer free business advice and helpful how-to's in order to help small businesses succeed in the Williamsburg community. Have a business question you'd like answered?

When it comes to setting up the legal structure of a new small business, there is no one-size-fits-all solution. As the founder of the business, you will be considering one of three legal forms–sole proprietorship, partnership or corporation–depending on answers to questions such as these.

  • Will I be the only owner? If so, you may choose to remain in a sole proprietorship. Easy to form, this structure allows the owner to make all the decisions and receive all the profits. The owner also enjoys relative freedom from most government control and reporting requirements.
  • How important is it to me to limit personal liability for debts or claims against my business? If it is highly important, you're most likely to incorporate the business.
  • Which legal form of business organization will result in the least amount of taxes? There is no simple answer here, which is one reason any small business owner should seek professional advice based on the circumstances of the owner and the business.
  • Which legal form will be the simplest to set up and maintain? Generally, sole proprietorship is generally the simplest and least regulated. In fact, if your business starts up without a partner, the law will classify your business as a sole proprietorship.

The greatest disadvantage to a sole proprietorship is that your personal assets and those of your family are not protected. Should there be financial problems or a lawsuit, your assets are at risk. Additional insurance will help minimize the risk and cover liability up to a certain dollar amount; however, you also assume greater personal liability.

With more than one owner, the business can form as either a partnership or a corporation. Partnerships come in two varieties: general or limited, both giving all partners a say in the decisions. General partnerships do not require a formal written agreement, although not having one would be a serious mistake.

Limited partnerships do require a formal written agreement, and also require the filing of a certificate. The general partnership stipulates that all partners have unlimited personal liability, but in a limited partnership, partners typically are liable only to the extent of their investment.
The main advantage of incorporation is the limited financial liability of the owner. Personal assets cannot be attached and ownership is transferred through the sale of stock shares. The corporation is a legal entity and will continue to exist until its legal dissolution, even if one of the principals in the business should die.

There are different types of corporate structures. A regular corporation has government control and reporting requirements. Corporate earnings are subject to double taxation: first profits, and then the shareholders' earnings through dividends. However, an S corporation provides the limited liability of the regular corporate structure, and earnings are taxed to individual owners at their individual rates. A limited liability company offers the benefit of limited liability without being as complex as a corporation.

However, no two situations are identical, so before you decide on your form of business organization, consult your tax advisor and attorney.

 

If you have questions about this or other business subjects, call SCORE at 757-229-6511 or e-mail info@SCOREwilliamsburg.org to arrange for a free and confidential appointment.  The Williamsburg SCORE office is located in the Williamsburg Chamber and Tourism Alliance Building at 421 North Boundary St.



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