How to Choose the Best Legal Structure for Your Business

Any business has a certain structure and legal form, which actually determines the basic provisions and processes of the enterprise, documentation, reporting, up to tax calculations and the accounting system.

This is an insanely important aspect that every entrepreneur should take care of in advance. If you are just at the beginning of your business journey and are looking for information about organizing, creating and running a company, then you are absolutely lucky to find this article.

A lot of companies kindly help young entrepreneurs to arrange these processes and provide the information, for example  https://www.incluence.net/en.

We will do our best to clarify many points for you and present them in an accessible and understandable form. It's no secret that the legal structure of a business has many branches and is not so simple.

Its most important task is to help in the distribution of responsibility, the creation of a certain system of your personal taxes and company taxes, determining the type of documentation and registration that suits your type of company and will be the most beneficial solution from the point of view of many aspects. If you're ready to learn more, read on.


What is a business legal structure?

What is a business legal structure

Let's start with the fact that it is important to specifically and correctly understand the definition – what is the legal structure of a business. Many people confuse concepts at the beginning of their journey, therefore, in order to avoid misunderstandings, we believe that providing this information is very important.

The legal structure of a business, or simply a business entity, is a certain classification, regulated at the state level, that defines all the main aspects of your business.

That is, these are certain laws and rules that are important for all companies to follow in order to remain in the legal field and be in the same legal space when interacting with each other. The legal structure of your business defines your tax liability and describes the levels and ramifications of responsibility between managers and employees.


Why is a business legal structure important?

The importance and significance of the legal structure for the company is difficult to underestimate. Here are just some of the aspects that it regulates and on which it has its influence:

  • Registration and license. Even at the initial stages, it is important for you to understand what type of license you should obtain and what registration process to go through. Depending on the structure, they can radically differ.
  • A complex and deep question that often becomes problematic for a company due to its inexperience and lack of a proper legal structure. To avoid problems with the tax, it is worth taking care of its availability.
  • Distribution of roles, responsibilities and hierarchy in the company. Quite an important factor, since often if a company has several co-owners or a board of directors, misunderstandings can arise between partners. The legal structure proposes to clearly define tasks for each participant and share responsibility fairly.
  • The procedure for obtaining and distributing profits. Depending on the type of structure, there are certain rules and procedures on how exactly a company can receive funds to its account and how to dispose of them. All this is the area of ​​responsibility of the legal structure.

Types of business structures

There are several types of structures that are the most common and popular in the world. This includes sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. We have selected the most important information about each type and made this compilation for you.

Sole proprietorship

The simplest and most understandable type. Only one owner, who himself is fully responsible for his activities and the activities of the company.

It doesn't take much effort or expense to set up such a company, the main ones being state and federal fees, taxes, business equipment rentals, office space, bank fees, and any professional services you contract for.

Partnership 

A partnership is owned by two or more participants. It’s also divided in two ways: a general partnership, in which everything is equally divided, and a limited partnership, in which only one partner controls the operations and another person contributes and receives a share of the profits.

Partnerships can operate as sole proprietorships, where there is no separation between partners and business, or limited liability partnerships, depending on the funding structure and responsibility of the organization.

Limited liability company 

Such companies are a kind of a mixed structure that allows owners, partners, or shareholders to limit their personal liabilities while enjoying tax benefits and partnership flexibility benefits.

Under an LLC, members are protected from personal liability for the debts of the business unless it can be proven that they acted negligently or wrongfully resulting in injury to another person in the course of the business.

Corporation 

A rather complex and confusing system that considers a corporation as a separate entity independent of its owners, with legal rights and obligations. A corporation can litigate, sue, own and sell property, and sell ownership rights in the form of shares. Inside there are types: there are closed, open, non-profit and other corporations.

Cooperative 

A cooperative is a unique form of enterprise because it is owned by the same people it was created for. The products of the cooperative benefit the members of the company, who are responsible for the mission and direction of the organization and share the profits among themselves.

The main advantages of the cooperative:

  • Funding Opportunities
  • High quality and level of service

Factors to consider before choosing a business structure

Factors to consider

Here are a few more important factors to consider before registering a business. Keep them in mind and be careful, as changing the legal form can be quite difficult if you initially choose the wrong approach.

  1. Review the business plan to accurately define the direction of development, flexibility and company values.
  2. Consider the size of the business, the number of participants, employees and the level of responsibility.
  3. Always remember the responsibility and risks, think in advance of the possible negative aspects of the development of events.
  4. Consider your start-up capital, consider tax expenses, license costs, equipment costs, office rent, salary.

We really hope that these tips have dispelled your doubts and clarified the understanding of the legal structure of your future enterprise.

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