The legal structure of a business dictates a wide range of things. Your business doesn't have to be a multinational corporation for its legal status to be a big deal either. Whether you are selling products by yourself online or employing thousands of people, you should understand how these four legalities will affect you.
Liability
One of the biggest reasons that even people who run one-person business practices care about legal structure is liability. You want the company's liability to be divorced from yours personally. If you run your business as a sole property, meaning that it's entirely unstructured and basically just one more thing that you own, you take on personal liability.
Suppose you run a web design firm out of a home office. A client comes for a consultation, but they slip on a wet patch on the sidewalk. Without a business structure, the liability falls on you rather than the corporate entity. If the person successfully sues, they can go after your personal assets after they've exhausted all of your business assets. Consequently, a business lawyer will always tell their clients to at least incorporate their enterprise as an LLC to install a liability firewall.
Taxes
Sole proprietorships and many partnerships are pass-through companies. For tax purposes, that means all income goes straight on your taxes as personal income. Especially if you have other sources of income, you might want to limit this so you can pay yourself less or use distributions to classify the income differently.
A corporate entity, on the other hand, pays taxes separately. By reducing your pay as a corporate officer or taking compensation as a distribution or dividend, you can more tightly control your personal tax status. Also, there are often deductions that are only available to fully incorporated entities.
Raising Capital
A major reason people often incorporate companies is to issue shares and raise capital. Selling shares allows you to trade the hope of future earnings for investment capital today. Also, you can use shares as compensation, allowing you to reduce your employee outlays in the company's startup days.
Transfer
Suppose you decide to sell a business. Its structure will determine how easy that might be. An incorporated entity with a board will require a vote. Also, a shareholding entity requires a vote of every shareholder. Conversely, some smaller structures either belong directly to you or effectively make you a corporate board of one person.
Contact a local business lawyer to learn more.
