Do you want to start a business in the US? Then the first decision you need to make is to pick the right legal business structure because the right business structure can bring your business success quickly.
However, it could be confusing for you to pick the right legal structure because it involves multiple complexities. To help you out, we are here. Read our discussion and learn how to choose the right structure for your business.
What Is the Legal Structure?
A legal structure is the road map of a business or company. Legal structure refers to the business structure that regulates crucial aspects of your business, including roles and responsibilities of employees, business operations, company goals, taxation, etc. In a word, the legal structure defines how a company is organized and operated.
How Does It Work in a Business?
We hope you now understand what a legal structure in business is. So, let’s discuss how it will work for your business. A legal structure is the framework of a company. It is necessary for every type of business because it decides how your company will be operated and how you can bring success to your company. If you choose a business legal structure, it can ensure the following facts:
- How your business will be operated.
- How should you manage your business?
- How to manage the ownership.
- How to outline the business budget.
- How to provide the security of the assets to the owners.
- How to increase business credibility.
- How you can pay the taxes.
- How you can raise capital and funds for your business.
A proper business structure will fulfill all the requirements—which are mentioned above—and help you grow your business rapidly.
Legal Business Structure Example
You can find numerous legal structures for businesses. The structures are used for different kinds of business entities. For your understanding, we will give a scenario about a legal structure.
Suppose you and your friend have started a business where you have full control of the company. Also, you both will share the profits and losses of your company. This is called a partnership in terms of legal structure. The tech giant Google was formed following a partnership business structure, but now it follows a corporate one.
Why Is the Legal Structure of a Business Plan Important?
You might have a question: “Why should I need a legal structure for my business?” Well, there are many reasons to apply a legal structure to your business plan. A proper legal structure for your business will benefit you in many ways, such as how much tax you will pay, the liability risk to your personal assets, your chance to raise capital, your business growth, and so on.
So, you can see that a legal business structure is fundamental. Now, let’s add some key points to indicate why following a legal structure for your business is actually beneficial.
- Registration: Choosing a legal structure is the precondition for registering a business. You must choose a legal structure if you want to register your business in the US in any state.
- Management: A legal structure determines how your business will run. It clarifies everyone’s roles, responsibilities, and decision-making processes in a company. So, a legal structure is important for running a business smoothly without any disputes.
- Ownership: You can determine how ownership will be divided between owners by choosing a legal structure. There are several legal structures, and every structure has a different ownership structure.
For example, by choosing sole proprietorship, you can ensure that you are the only owner of your business. On the other hand, a C corporation has several shareholders or owners. - Liability: By choosing the right business structure, you can ensure your personal property protection from lawsuits. Suppose you choose LLC; it means your personal assets are risk-free from business losses.
- Taxes: A legal structure can ensure how you will pay your taxes for your business. Also, it can help you get tax deductions and several tax benefits.
- Fundraising: Some legal structures allow you to raise funds for your business, such as LLCs and corporations.
Also, if you form an LLC or corporation, it will be easy for you to attract investors. So, it proved that choosing a suitable legal structure is important for every company’s growth.
How to Choose the Best Legal Structure for Your Business?
1. Analyze the Best Legal Structures
As you read this blog carefully, we assume you are interested in forming a US company. So, it’s safe to advise you to choose a business structure before everything else. But be careful about choosing a legal structure because the wrong one can cause your business to fail.
For your ease, we will now guide you in picking the proper legal structure for your company.
You can find a lot of business structures, but most successful companies follow four types of business structures. Those are sole proprietorships, LLCs, partnerships, and corporations. There are short descriptions for every structure given below-
A. Limited Liability Company (LLC)
An LLC is the most common business structure not only in the United States but also around the world. LLC is the most flexible business structure offering uncountable benefits, including liability protections, tax benefits, flexibility in ownership, etc.
Because an LLC is a hybrid of both partnerships and corporations, it can provide you with the benefits of both. From small businesses to larger businesses, LLCs are beneficial for achieving success everywhere. Also, startups and freelancers prefer LLCs in the US because this business structure can bring quick success.
B. Partnership
A partnership business structure happens when one or more people start a business with equal ownership and control. In this structure, every owner is equally responsible for managing the business and making profits and losses. The partnership is kind of similar to the sole proprietorship. For small business owners and family businesses, a partnership would be beneficial.
C. Sole Proprietorship
A sole proprietorship business structure means there’s only one business owner. If you form a sole proprietorship business, it indicates that you are the only one who runs and manages the business. And you are completely responsible for business profits and losses.
Many larger companies in the US start their journey as sole proprietorships, like eBay, Walmart, etc. This structure is beneficial for small businesses because it’s easy to start. Also, most freelancers in the US prefer sole proprietorship because of its simplicity.
D. Corporation
The corporation’s business structure is broadly formed in the US. A corporation is a separate legal entity from its owners. This means the owner or shareholder can contribute to the business, but there is no liability risk. Both small and giant businesses adopt corporations as their business structure because both parties get several benefits from forming a corporation. But in this case, they must choose an S corp or a C corp.
- S Corporation: S corp is suitable for small businesses because an s corp can only have up to 100 shareholders. Also, S Corp offers several benefits such as liability protection, pass-through taxation, tax savings, ownership flexibility, funding opportunities, etc.
- C Corporation: Giant companies adopt c corp because they can hold over 100 shareholders and have unlimited stocks. C corp offers several advantages to the shareholders, including asset protection, employee benefits( insurance, healthcare, tax benefits), funds, etc.
2. Analyze Business Structure Considerations
Before choosing a business structure for your company, you should consider some crucial facts. These facts will help you pick the ideal legal structure for you. Here are those facts:
- Tax: The legal structure you choose affects business taxation. Suppose you’re a sole trader or a partnership business owner; your tax rates will be based on your personal tax rates. But you’ll have double taxation if you’ve structured your business as a corporation with shareholders. So, decide which taxation you want and choose the legal structure.
- Liability: Not all business structures provide asset protection to the business owners, like sole proprietorships. So, if you want liability protection, choose the legal structure that can provide it.
- Operations: We know that different business structures have different operation and management systems. Some structure has more work flexibility than others.
- Investment: A corporation and LLC are likelier to get investors or capital. But sole trader has less chance. So, if you need funds, choose that legal structure.
- Complexity: People with a start-up want less complexity and formality in their business setup procedures, costs, and annual report filing. Sole traders and partnerships have fewer formalities. Choosing a less complex legal structure can free you from much complexity.
- Ownership: A legal structure can decide the ownership of a business. Suppose, you want full control over your business, then choose sole proprietorship. So, you will need to decide which ownership you will want.
- Cost: Legal structure decides how much you must pay to form or run a business. A corporation is costly to form and manage. So, choose a sole trader or partnership if you want to cost less.
3. Choose According to Your State
If you want to start your business in the US, you must do a little research about the states. You might not know that every state has different business requirements, including tax compliance, formation rules, and annual report filing.
And for different legal structures, different states are beneficial. For instance, Delaware is best for LLCs. So, if you want to start up in Delaware, we could say an LLC can be a good choice for business. Also, choosing a structure according to your state can provide you with market diversity, your target audience, etc.
4. Analyze Business Requirements
Clearly, every type of business requires different business requirements. And choosing a suitable legal business structure can meet those requirements. Let’s discuss how to get those business requirements through a legal structure.
- Budget: The first requirement for a business is a budget, like how much you will need to start a business, how much you will need to run the business, marketing costs, product-making costs, and employees’ salaries.
To ensure all this, you should choose a suitable legal structure according to your budget. If you have a small budget and form an LLC, you could raise the funds by adding members. So choose your business structure according to your budget. - Resources: You must analyze that you can get all the resources if you form a proper business structure. Because if you fail to do that, you can get a loss.
- Product or Production: Your business product or service is crucial for choosing a business structure. Choosing a business structure can define the management of how a product will be made, and how it will be delivered to the customer. A suitable business structure can raise your production. So analyze your business requirements before choosing a legal structure.
- Licenses: To run your business, you may need several licenses or permits. A legal structure can help you get those easily.
5. Analyze Business Risk
Do you want to establish your business without any losses? Then analyze the business risks before forming your company. Certain products and services are profitable but have high risks.
In this situation, find the risk you can face, then choose the appropriate legal structure for your company to recover. We know that C Corp provides asset protection. If your products and services have a chance of being at risk, then you should choose a C corp or LLC.
6. Analyze Business Goals
Every business’s primary purpose is to be successful, but they have different business goals and targets to achieve. The legal structure can ensure that you meet your business goals.
Analyze your business goals like quick business growth, instant credibility, attracting investment, etc. Then choose the legal structure that can help you achieve your goals. Suppose you want to attract investors for your business, then you should form a corporation or LLC.
7. Consult With an Expert
This is the last and crucial step in choosing a legal structure. If you can’t decide which structure will be right for your business, save time and consult with an expert like Business Globalizer.
Business Globalizer has seven years of expertise in business formation, consulting business structure, providing formation services, and client support. So they can help you select the right structure and provide you with all the needed services and support.
FAQs
Q1: What are the most common legal structures for a business?
Answer: Although you can find several types of business structures, including sole proprietorship, cooperative, non-profit corporation, corporation, and LLC, most businesses follow four types. These are the most common legal structures formed worldwide-
- Sole proprietorship.
- LLC.
- Partnership.
- S corp.
- C Corp.
Q2: What legal structure is best for international business?
Answer: LLCs are flexible in all ways, including management, taxation, ownership, and liability protection. Also, LLCs provide the flexibility to run a business in the US from anywhere. That’s why an LLC is considered the best legal structure for international business.
Final Words
At this point, we hope you have clear details about different legal business structures and how to choose a legal structure for your business.
Starting a business is simpler and cheaper than you might think. Also, a suitable business structure can bring you continued success with the addition of hard work.
