Shortly after making the decision to start a new business venture, you need to determine the structure of the organization that will suit you the best. You will have a few options:
If you make the decision to form an LLC or Corporation, an experienced business law attorney in Santa Monica or Los Angeles can help you with the process and answer any questions you may have.
The Advantages and Disadvantages of the Various Business Structures
It is important to keep in mind that the business structure you choose will have an impact on the amount of taxes you pay, your ability to raise revenue, and your legal responsibility if your organization is sued. Consider the advantages and disadvantages of each.
With a sole proprietorship, the typical setup for the single business owner requires minimal paperwork. The owner has complete control of the organization.
However, the primary disadvantage is that there is no separation between personal and business liability. Also, this type of business structure makes it more difficult to raise money from potential investors.
A general partnership also requires minimal paperwork and is the default configuration for businesses with multiple owners. The division of ownership is at the discretion of the owners. Like the sole proprietorship, profits are claimed on the tax return of the individual owners.
An enormous downside to a general partnership is that there is not a separation between the liabilities of the business and the owners. There is the chance the vision of the partners may not align as the business grows, which can lead to conflict. This is also a poor business structure for raising capital from investors.
This disadvantage can be circumvented by forming a limited partnership, but in this type of structure, the owners have restricted control in the management of the company.
An LLC protects the owner(s) from personal liability. Relative to a corporation, there is a smaller amount of record keeping. Additionally, the distribution of responsibilities and profits can be divided easily. An LLC is not the best structure for raising money from investors or venture capitalists. All of the income earned by members of the LLC is subject to self-employment tax.
A C-Corporation has the protection from personal liability as well and with this structure, there are fewer obstacles to raising capital as it is frequently perceived as a more established business entity.
The disadvantages are that C-Corporations are more expensive to form, members are double taxed, and the required paperwork is quite extensive.
Finally, we have the S-Corporation. It protects members from personal liability and profits are claimed on personal tax returns, as well. The main drawback is that only a few companies are eligible and it has limitations on the issuance of shares.
Hire an Experienced Business Lawyer in Los Angeles
At Verhagen Bennett, we represent our clients in a wide range of matters from the initial startup through the growth of the business. We offer practical guidance and advice that helps our clients make the essential business decisions that will lead to their company’s success. If you would like knowledgeable legal counsel to represent you or assistance with business legal matters, schedule an appointment to learn how we can help you.
© 2018 Verhagen Bennett LLP — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.