Before your new company can lawfully operate within a given state, you’ll need to make key decisions about how it will be taxed, what its managerial structure will consist of and who will formally own part or all of the business itself.
All of these questions – in addition to matters of personal liability, reporting requirements and formation procedures – are matters that are addressed when a company’s legal structure is finalized. Once you choose a legal structure for your company, your business will be required to follow all laws and regulations that govern that particular structure type within any state where you choose to operate your business.
There are four main legal structure types that new business owners are empowered to choose from:
- Sole proprietorships
- Partnerships
- Limited liability companies
- Corporations
Note that some states allow for hybrid versions of some of these options, especially in the case of partnerships.
Initial structures and conversion considerations
By carefully considering the legal structures available, you’ll better ensure that your entrepreneurial vision will ultimately be a success. Oftentimes – although certainly not always – it makes sense to launch a startup as a sole proprietorship or as a partnership and then reevaluate whether the business should ultimately be restructured as an LLC or corporation once it is turning a profit.
However, there are good reasons to launch as an LLC or corporation under certain circumstances, so take the time to get legal guidance regarding the pros and cons of each approach before committing to one option over all of the others.