Choose Your Business Legal Structure

Three out of four businesses fail in their first three years. Not because they are lazy or have no desire to succeed but often because they have not done the proper planning or acquired a toolbox for success. It is my desire that I can help at least one of those three businesses become a success story.

Let's start with the first decision that you should make as a business owner. What will be the legal structure of your business? Some of you may be established business owners, new business owners or thinking about starting a business. Regardless of your status, it is important to understand the different legal structures to ensure that have chosen wisely. I am not an attorney so this article is for information only. You should consult an attorney that specializes in working with business owners as well as a certified public accountant (CPA) regarding the legal structure of your business. No matter which option you choose, there will be legal and financial consequences that you must consider.

Sole proprietorship – this is a very common structure for smaller businesses. Essentially, the business and the individual operating the business are sharing assets and liabilities. All of the profits from the business are taxed as income for the owner. Although the owner has complete ownership of the assets, the owner is also personally liable for all of the debts incurred by the business.

Limited liability corporation (LLC) – this form of corporation allows business owners to protect their personal assets by creating a legal entity that is not associated with their personal assets. The business is able to incur debt and acquire assets separate from the business owner.

General partnership – this exists when two or more people come together and decide to share in the profits and losses of a business. A partnership agreement should be created to document the responsibilities and liabilities of each partner as well as a contingency plan in case a partner dies or wants to exit the partnership. Each partner is liable for the debts incurred by the business and the profits are taxed to each partner based on their percentage of ownership in the business.

Limited partnership – this is essentially the same as a general partnership except there are two types of partners: a general partner who has greater control over the business and limited partners who share in the profits and liabilities based on their investment percentage.

'C' Corporation – this form of a corporation establishes the business as a separate entity with its own rights, privileges and liabilities. The corporation is made up of a board of directors, shareholders and officers. You must file articles of incorporation with your local probate office and State of Alabama to be legally recognized as a corporation. Although this legal structure provides more legal protection for the owners, it is subject to more government regulation and profits can be taxed on the corporate and individual level.

'S' Corporation – this form is very similar to a 'C' Corporation except it allows the corporation's shareholders to only be taxed once - as a partnership or as a sole proprietor.

I hope this information was helpful. Don't forget, call your attorney if you have any questions.