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How to pick the right legal entity when forming a business

Choosing the right legal structure can have a profound impact on the future of your business. The type of legal entity you select can affect whether your business succeeds or falls apart in the first few years. Therefore, it is important to carefully select the one that appropriately fits the needs of your business.

There are four common types of legal entities, including sole proprietorships, partnerships, corporations and limited liability companies. Each type of legal entity contains more specific legal structures. While there is not one that is better for the others, there is likely one that is better for you.

Sole proprietorship

A major benefit of a sole proprietorship is that it is inexpensive. Additionally, it is less complicated than other business entities, because only one person is responsible for the business’s profits and debts.

However, as your business continues to grow, you might want to consider becoming a partnership or corporation. That way, you can protect yourself from liability and separate your personal assets from the business’s assets.

Partnerships

Partnership are business entities comprised of two or more people. There are two types of partnerships: general partnerships and limited partnerships.

Partners in a general partnership share all the personal assets and profits of a business. However, they are also subject to a partner’s debts as well. While this type of partnership allows equal management and decision-making power, each partner can be subject to the business’s debts.

Limited partnerships, on the other hand, are a little more expensive. However, they can provide more liability protection. While the general partner is the only one who can make decisions for the business, he or she is also subject to personal liability. The other partners, who do not participate in the management duties, are “limited” in liability if the business takes on debt.

CorporationsCorporations are legal structures that are separate from the owners of the business. There are several types of corporations depending on the structure of a business. They can include C corporations, S corporations, B corporations, closed corporations and non-profit corporations.

Corporations are made up of shareholders, who buy stock in the company. While these people share in the business’s profits, they are not personally liable for the business’s debts. However, corporations can have tax disadvantages as well, which can include double taxation.

Limited liability: One of the most popular types of business entities is a limited liability company (LLC). This type of entity includes aspects of sole proprietorships, partnerships and corporations. While an LLC can help protect members from liability and provide members with tax advantages, it can also come with several disadvantages. For example, unlike a corporation, a new LLC needs to be created when a member dies or files for bankruptcy.

Choosing which type of business entity is right for you can be complex. It can be beneficial to consult with an experienced business attorney to discuss your next steps and select a structure that is right for you.

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