Are you thinking of starting a new company and confused about how to legally structure it? If the answer is yes, you’ve come to the right place to find the answers. Let us share a few business structures that will help you legally structure yours in a better way.
Say you’re starting a business in California, before you can even think about applying for the California seller’s permit or the wholesale certificate, the most important first step is to form the business structure. In essence there are two themes to a legal structure, they can either be Informal or Formal.
In an informal structure they can mainly be of two types Sole Proprietorship and Partnership and in a formal structure they can either be a Limited Liability Company (LLC) or a Corporation. Let us discuss them in elaborate detail for the better understanding of our readers.
Informal structures are called so due to them offering no real protection to their owners. Let us read more about them down below.
This is a business structure that is solely owned by an individual. This business structure usually lacks a proper formal structure and there is no noticeable separation of the owner from the business itself. The owner is on an individual level liable for any legal action that would otherwise be taken against the company. This is because all the tax would be filed under his/her/their name.
A partnership is quite similar to what a sole proprietorship is. The only difference between the two is that in a partnership there are multiple owners who hold all the power in the business. The partners have no recognizable distinction from their business and they’re personally responsible for any and all legal mishaps.
Where these two informal structures are quite easy to form, they have a lot of disadvantages. Since the owner and business are often recognized as the same organism, there is no legal protection of personal assets, there is no particular tax benefit, no great opportunity for business growth and very less credibility.
Formal structures are for serious businesses only. The businesses who are structured in a formal way enjoy a lot more freedom and safety in terms of protection as the business are recognized as separate entities from their owners. The two formal structures that are most popular are discussed in brief below.
Limited Liability Company (LLC)
A Limited Liability Company or LLC is a formal business structure that has been running strong since 1977. The owners of these companies are referred to as ‘members’ instead. It is the simplest structure that both ensures a separation between the member and the business, which in turn means that there is no legal threat to personal assets of the members as the business is an entire separate entity from them.
Quite similar to LLC but with a twist we have a corporation. A corporation is a formal business structure that is owned by shareholders. The business in question has its whole separate identity. This means that the company can on its own buy, sell property, sue others and be sued itself etc.
Now further corporations are of many types like: S-Corp, C-Corp, Non Profit Corp, B-Corp etc. With slight differences, they are essentially a corporation at the center.
After elaborately talking about formal business structures that companies can form, it is pretty obvious how beneficial they are as opposed to the informal structures. They offer a lot of advantages for their ‘members’ like personal asset protection, many tax benefits, immense potential to grow and a heightened trust and credibility amongst its customer base. The one disadvantage about formal business structures can be the cost of maintenance but with the immense growth potential they can easily cover it.