How to decide which legal structure is right for a new business

On behalf of Steven Waldinger

This article looks at three of the most common legal structures for new businesses and their pros and cons.

According to the New York SBDC, small businesses account for 99 percent of all New York businesses and the state ranks as the fifth-most entrepreneurial in the country. That makes New York a great place to start a business. Starting a new business is an exciting if sometimes complicated process. Along with creating a business plan and potentially applying for loans and government support, new business owners will have to decide what kind of legal structure they want for their business. For new businesses, there are three main types of structures to choose from: sole proprietorships, partnerships, and corporations. Below is a look at each business structure and their respective advantages and disadvantages.

Sole proprietorship

This is the simplest legal structure for a business. Essentially, any unincorporated business that is owned by just one person is a sole proprietorship. Sole proprietorships are extremely easy and cheap to set up. As the Better Business Bureau points out, a sole proprietorship only needs to be registered with the county clerk’s office if it is operating under a fictitious name. Because only one person is operating the business, the decision-making process is also very straightforward. The main disadvantage comes in the form of liability. There is no dividing line between business and personal assets, meaning that if the business runs into trouble creditors could come after the sole proprietor’s personal assets.

Partnerships

A general partnership shares many of the benefits of a sole proprietorship, but the risk and responsibilities are spread between two or more owners. A partnership is fairly easy to set up, although it is a good idea to have an agreement in place beforehand to determine each partner’s duties and what will happen to the business in the event that one partner dies or withdraws from the partnership. On the downside, personal assets may still be exposed to creditors and any profits from the business will have to be split between the partners.

Corporations

Corporations are the most complicated type of business to set up and generally the most expensive to run. Corporations also must adhere to strict legal requirements and are subject to double taxation (once on its profits and then again on the dividends shareholders make). That being said, corporations have significant advantages over sole proprietorships and partnerships. Corporations are usually able to raise much more capital than smaller business entities. Furthermore, those who sit on the board of directors at a corporation will not have their personal assets exposed to any claims made against the corporation.

Help with business formation

Choosing the right legal structure for a business is a decision that should be taken with care. There are many legal and tax implications for each structure, which is why prospective business owners should talk to a business law firm for help. With experienced legal counsel on hand, new business owners will have the guidance they need to make sure they are making the best decisions for their enterprises’ growth and potential.