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7 Factors to Consider When Choosing Your Business's Legal Structure

7 Factors to Consider When Choosing Your Business's Legal Structure

When it comes to shaping the backbone of your business, seven leaders, including CEOs and an attorney, weigh in on the pivotal factors they considered beyond liability protection. From the crucial understanding of personal liability in business to choosing a scalable business structure, this article spells out seven key considerations that could steer your decision on your business's legal structure.

  • Understanding Personal Liability in Business

  • Preparing Flexibility for Future Business Changes

  • Valuing Expert Legal Guidance

  • Including Succession Planning in Family Business

  • Attracting Talent with S Corporation Benefits

  • Considering Tax Implications

  • Choosing a Scalable Business Structure

Understanding Personal Liability in Business

Liability protection, after developing your product or service, is the most important legal consideration because it addresses the level of personal liability you, as a business owner, are willing to assume. Different legal structures offer varying degrees of protection against personal liability for business debts, lawsuits, and obligations.

Sole Proprietorship: In a sole proprietorship, there's no legal separation between you and the business. You're personally liable for all business debts and legal obligations. This means your personal assets are at risk in the case of business-related lawsuits or debts.

Partnership: Similar to a sole proprietorship, partnerships expose partners to personal liability for business debts and legal issues unless certain measures are taken to limit liability.

Limited Liability Company (LLC): An LLC offers limited liability protection, meaning your personal assets are generally shielded from business debts and liabilities. Your liability is typically limited to the amount you've invested in the company.

Corporation: Corporations provide strong liability protection. Shareholders' personal assets are generally protected from business liabilities. However, certain actions, like personal guarantees or gross negligence, can expose shareholders to liability.

Choosing a legal structure is a crucial decision that impacts various aspects of your business. It's advisable to consult with legal and financial professionals who can provide personalized guidance based on your specific circumstances, goals, and risk tolerance. They can help you navigate the trade-offs between liability protection, taxation, complexity, and other factors to make an informed decision.

Preparing Flexibility for Future Business Changes

For me, choosing a structure was as much about creating a business as it was about future planning and understanding which legal structure would work best. It also needed to provide us flexibility down the road for investors to come into our structure or for an exit strategy.

Valuing Expert Legal Guidance

I was blessed to have an amazing small-business attorney in my network this time around. Having learned the hard way from my first business, where I skipped legal help, I was all in for doing things right from the get-go.

Their guidance was a game changer. They helped me navigate the legalities with ease, setting up a solid foundation for my business. It's like they always say: Smart planning and expert advice are key to success. This experience taught me the value of not just dreaming big but also planning wisely.

Including Succession Planning in Family Business

In selecting the legal structure for my family-owned business, succession planning was a key consideration. We needed a structure that would facilitate the smooth transition of ownership and management to future generations.

After careful consideration, we chose a Family Limited Partnership (FLP). This structure provided a clear path for succession, allowing us to define roles and distribute interests in a way that supported our long-term family and business goals, ensuring stability and continuity.

Attracting Talent with S Corporation Benefits

One factor I considered was the ability to attract and retain talented employees. I decided on an S Corporation for its potential benefits in employee recruitment and retention. This structure allowed me to offer desirable employee benefits, like stock options, which can be a powerful tool in attracting high-caliber professionals.

Additionally, as an S Corporation, the business could save on self-employment taxes, indirectly benefiting the employees as well. In today's competitive job market, having an edge in employee benefits can make a significant difference in building a strong and dedicated team.

Gil Clark Jr., CEO, GH Clark

Considering Tax Implications

When choosing a business's legal structure, it's crucial to consider the impact on tax obligations. The type of business structure selected significantly influences the tax responsibilities of the business owner.

For instance, a sole proprietorship may have fewer tax obligations, while a corporation may offer different tax benefits. Understanding these implications is essential for making informed decisions about the business's financial responsibilities and obligations to the government. This factor is important as it directly affects the financial health and compliance of the business, making it a key consideration when choosing a legal structure.

Javier Villarreal, Texas Personal Injury Lawyer, Villarreal & Begum, Texas Law Guns

Choosing a Scalable Business Structure

One key factor we considered was the potential for growth. We wanted a structure that would allow us to scale smoothly, attract investors, and adapt to the changing market without being bogged down by excessive red tape.

Choosing the right structure meant setting the foundation for our future ambitions, ensuring we could seize opportunities without structural constraints. It was about keeping the doors open for evolution and expansion, as the business landscape is always shifting, and we needed to be ready to move with it.

Alex Stasiak, CEO and Founder, Startup House