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Choosing the best legal structure for your business

Choosing the best legal structure for your business

| Jan 5, 2021 | Business Formation

Selecting the appropriate business entity for your company here in Tennessee is crucial. The process begins by researching and considering all federal, state and local laws and assessing your goals. Each structure contains different legal, financial and operational considerations.

Issues that impact choosing an entity

It’s not always easy to identify the best structure when envisioning a new business. You have to consider your immediate financial needs as well as the company’s ability to grow. Here are a few considerations:

  • Avoiding high taxes
  • Limiting liability exposure for products, services or location
  • Estimating earnings and deductions
  • Factoring a partner or investor into the company
  • Measuring the ability to raise capital
  • Marketing plans and goals for the business
  • Administrative costs

Types of business structures

After weighing all the factors for your business, the four most common entities to choose from are:

  • Sole proprietorship: Under this structure, one person is responsible for all of the company’s profits and debts. They are typically easy to set up while license fees and business taxes are generally reasonable. You may qualify for specific business tax deductions, and they are easy to dissolve.
  • Partnership: This entity has two or more owners who can share in all equally or draft limited partnerships where one person controls the company, and other partners’ contributions and income are specified. These are also easier to form, there’s typically more growth potential, and certain tax benefits are possible.
  • Limited liability company: LLCs are hybrid entities allowing owners to limit their personal liability exposure while receiving certain tax and other benefits offered under a partnership, such as earnings being passed along as income on their individual tax returns.
  • Corporation: These entities sell the rights of ownership through stocks. Corporations are separate from their owners, who, along with stockholders, enjoy limited exposure for claims made against the company. With multiple investors, it is usually much easier to raise large amounts of capital.

Making the right choice

It’s essential to lay the groundwork for selecting the appropriate business entity that makes the most sense for your business, both from a legal and financial standpoint. Working with an experienced business formation lawyer is crucial for protecting your interests while avoiding unnecessary costs. More importantly, a knowledgeable attorney understands how to limit personal liability exposure and risks of lawsuits from competitors and customers.