Identifying Your Business' Legal Structure

By CSD  |  October 11, 2021

Please note that terminology, laws and regulations often vary based on several factors, including industry, location, and more. It’s important you check your local guidelines before taking action. If you have questions, please contact us.

According to a survey conducted by the NSBA, 1 in 4 startups don’t receive the funding they need to get off the ground. Knowing

Before you introduce your business to the world you need to decide what type of business entity you’re going to form. This preliminary decision should not be made lightly because they have a long-term impact on your ability to operate.

When considering what type of business structure to form, you typically need to take four things into consideration:

  • How many people will be involved?
  • How much risk are you willing to take and where do you want liability to fall?
  • What type of taxes you need to pay (personal, employment, corporate)?
  • What type of industry are you in?

Which Business Structure is Right for You?

Sole Proprietorship

  • One Person
  • Personal Risk
  • Personal Taxes

Pros

Easy to set up
Less expensive
More control
Simple structure

Cons

Unlimited personal liability
Fewer funding options
Less leadership support

Traditionally, sole proprietorships are the easiest businesses to form. Because you and your business are considered one entity, there is less government oversight and fewer tax obligations. However, in a sole proprietorship, you are 100% liable for your business. This means you get to keep more of your profits, but you can also lose your personal assets if your business doesn’t do well or is sued. A sole proprietorship is usually preferable if you’re able to finance your business on your own without loans or shareholders, you’re operating in a low-risk industry, and you don’t see your business growing to include more people.

Partnership

  • Two or more people
  • Personal Risk
  • Self Employment and Personal Taxes

Pros

Easy to set up
Less expensive
Management support
Simple structure

Cons

Personal liability
Profit-sharing
Interpersonal conflict
Informal relationship

In a partnership, two or more individuals go in on a business together. Partnerships operate in a similar fashion as a sole proprietorship because the business structure is simple and easy to set up, you have limited government oversight and fewer tax obligations. There are a few drawbacks to forming a partnership. For example, if one partner decides to back out or passes away the entity dissolves. You and your partners will also have unlimited personal liability – like a sole proprietorship. You should consider a partnership if you’re working with one or more person, are self-funded, and in a low-risk industry.

Limited Liability Company (LLC)

  • One or more people
  • Limited personal risk
  • Self employment and personal taxes

Pros

Limited liability
More professional
More access to capital
Management flexibility

Cons

Reporting and fees
Limited capital sources
Additional taxes

You can think of an LLC as a cross between a corporation and a partnership. An LLC has a simpler structure than a corporation but with this option you won’t be risking your personal assets and property. Unlike a sole proprietorship or partnership, you will pay self-employment taxes and personal taxes on your profits, but you will still avoid corporate taxes. An LLC is ideal for entrepreneurs who are starting a riskier business and want to protect their personal assets.

C-Corporation

  • One or more people
  • No personal risk
  • Corporate taxes

Pros

No personal liability
Access to capital & investors
No personal taxes
Perpetual existence

Cons

Double taxation
Complex structure
Less control
More paperwork

When it comes to Venture Capital (VC), startups offer equity (partial ownership) of their business to an interested investor who in turn provides financial and technical support and shares in your profits. This investor could be a business, a firm, or a group of indivPursuing a C-Corp structure tends to involve more paperwork and be more expensive than those discussed above but it also offers more security. If you decide to form a C-Corporation your personal assets will be protected in case of debt or lawsuits. You will also be able to continue to conduct business if a partner or shareholder leaves. With this structure, you will have more access to funding through loans and investors and may be able to put less of your personal finances into your business. You may want to start a C-Corp if you’re entering a medium to high-risk industry and need a lot of capital.

S-Corporation

  • One - 100 people
  • No personal risk
  • Corporate taxes

Pros

No double taxation
Limited liability
Simpler accounting
Access to more investors

Cons

Shareholder restrictions
Complex structure
Reporting requirements
Salary requirements

An S-Corp has both the tax-exempt benefits of a partnership, and the benefits of sharing profits and losses with shareholders found when starting a corporation. If you start an S-Corp, you will need to limit the number of shareholders to 100 U.S. citizens. You should consider forming an S-Corp if you’re entering a medium to high-risk industry, need capital from outside sources, but will have fewer than one hundred shareholders.

B-Corporation

  • One or more people
  • No personal risk
  • Corporate taxes

Pros

Marketing and publicity
Access to capital
Limited liability

Cons

Strict reporting regulations
Annual fees
Less control
Not available in all states

B-Corps are very similar to C-Corps, the main difference being they need to provide a public benefit in addition to bringing in profits. B-Corps need to prove that they are both profit-driven and mission-driven. These businesses are held to a higher standard of transparency and participate in a rigorous review process to prove that they are both socially and environmentally responsible. This option is suitable for businesses in medium to high-risk.

Nonprofit Corporation

  • One or more people
  • No personal risk
  • Tax exempt

Pros

Tax-exempt
Access to grants & donations
Limited liability
Marketing & publicity

Cons

Strict reporting regulations
Less control
Paperwork
Startup costs

Non-profits have a similar structure to C-Corps but provide a public service (charity, religion, education, etc.) and therefore do not need to pay taxes on their profits. Non-profits have greater access to private and public grants, and can accept charitable donations. This alleviates some of the stress connected to funding your business. However, you’ll need to keep more detailed records, will have more paperwork to complete, and will have less control over the direction of your organization as most states require non-profits to have a board of directors. This option is only available to businesses operating within certain industries.

Getting Started

Each business entity comes with its own process. Once you’ve determined which business model best meets your needs, it’s important to investigate your next steps, including the type of paperwork you will need to get started.

Contact Us

If you’re struggling to determine which business structure best suits your big idea, you can reach out to our professionals for guidance or subscribe to our monthly newsletter below to continue to receive tips and insights. 

Rosa Lee Timm

Division President & CMO

Dallas McCarthy

Venture Fund Associate

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