Once you have organized yourself and prepared to start a business, the next important step is to make the business legal by registering it with the appropriate authorities.
Contact local county, regional, or city authorities — the same offices responsible for business taxes and licensing — for specific details, registration requirements, licenses, and necessary forms.
In many cases, it is wise to seek advice from an attorney or accountant in order to fully understand the advantages and disadvantages of different legal business structures before making a final decision.
It is also important to note that as a business grows or its needs change, its legal structure can also be changed, although this usually involves additional paperwork and expenses.
The following are common types of business structures:
Sole Proprietorship
Is it possible to start a business without filling out forms or paying registration fees? In some cases, yes. For example, in the United States and many other countries, there may be no need to file federal paperwork to become a sole proprietor. In some countries, registration is only required once business revenues exceed a certain amount.
However, it may still be necessary to register the business name with local or regional authorities. This usually involves completing a few forms, including tax forms, and paying a registration fee.
A sole proprietorship does not necessarily mean that only one person works in the business. It simply means that one person owns the business. Generally, sole proprietorships are easy to set up and involve simpler tax reporting procedures.
Advantages of a Sole Proprietorship
- No interference from partners or shareholders
- Simpler tax structure
- Minimal legal paperwork
- Full control of decision-making by the owner
Disadvantages of a Sole Proprietorship
- Loans usually depend on the owner’s personal reputation and guarantees
- Creditors may seize the owner’s personal assets to recover debts
- Limited tax benefits
- Personal and business finances can become mixed together
- The business may be difficult to sell because it depends heavily on the owner’s knowledge and experience
Partnerships
A partnership consists of two or more people joining together to operate a business.
If an entrepreneur prefers working alone and independently, a partnership may not be suitable. However, if the entrepreneur enjoys teamwork, needs additional skills or experience, or requires more financial support and borrowing power, a partnership can be highly beneficial.
Entering into a partnership should never be taken lightly. Even if two people get along well personally, running a business together presents different challenges. Successful partnerships require clear planning, clearly defined responsibilities, and written agreements outlining each partner’s role.
In some countries, there are different types of partnerships, including senior partnerships and cooperatives. Additional personal and family-related complications may also arise if spouses or relatives become heavily involved in business decisions.
Advantages of Partnerships
- Shared responsibilities and workload
- Increased capital and borrowing power
- Access to additional skills and experience
- Emotional and professional support from partners
Disadvantages of Partnerships
- Possible disagreements and conflicts
- Shared profits
- Decision-making may become slower
- Problems caused by unequal effort or commitment among partners
Limited Liability Companies (LLCs)
An LLC can be established by an individual or by several partners. The owners of an LLC are legally referred to as members. A member may be an individual, partnership, or corporation.
One of the main advantages of an LLC is limited liability protection. Similar to a corporation, the owners are generally protected from personal responsibility for business debts and legal claims.
LLCs often combine the flexibility of partnerships with some of the legal protections of corporations.
Incorporation (Corporations)
A corporation is considered a separate legal entity. This means it can own property, sell property, sue others, and be sued independently of its owners.
Many business owners choose incorporation because of the protection it offers against personal liability. If the corporation fails, creditors usually cannot pursue the personal assets of the owners; they can only claim the assets owned by the corporation itself.
However, incorporation is generally the most complicated and expensive business structure to establish. Legal fees, filing fees, registration documents, and accounting requirements can make the setup process costly.
Advantages of Incorporation
- Strong legal protection for owners
- Easier access to investment and financing
- Business continuity even if ownership changes
- Increased business credibility
Disadvantages of Incorporation
- Expensive and complex setup process
- More legal and tax requirements
- Increased paperwork and reporting obligations
- Possible double taxation in some countries
Subchapter S Corporations (S Corporations)
An S Corporation shares similarities with both corporations and LLCs. One major advantage is that it is often easier to sell shares in an S Corporation than in an LLC.
Unlike regular corporations, S Corporations usually do not pay corporate income tax directly. Instead, profits and losses are passed on to shareholders, who report them on their personal tax returns.
Entrepreneurs should carefully study the differences between LLCs, corporations, and S Corporations before making a decision. Some experts believe LLCs are better for small business owners because they are more flexible, while others argue that S Corporations provide tax advantages for owners nearing retirement.
Professional advice from attorneys, accountants, or tax authorities is strongly recommended before choosing a legal business structure.
Final Thoughts
These are some of the most common legal business structures recognized in many countries around the world.
A sole proprietorship may be suitable for entrepreneurs who have sufficient knowledge and enough capital to operate independently. Partnerships can also be highly effective because responsibilities, skills, and financial burdens can be shared among partners, making operations easier than working alone.
As a business grows and generates more revenue, entrepreneurs may later choose more advanced structures such as LLCs or corporations in order to expand operations, attract investors, and reduce personal liability.