One of the most important aspects of starting a new business is choosing what type of legal structure your business will have. The structure will determine your legal responsibilities, taxes, type of business insurance, and personal liability among other things. The most common types are sole proprietors, partnerships and corporations. Below is an overview of each type and some potential advantages and disadvantages of each.
Sole Proprietorship
In a sole proprietorship, you are the only owner and there is no legal distinction between yourself and your business activities. All profits and losses are yours alone.
Pros:
- Simple and inexpensive to start up and discontinue
- You have sole control over your business and reap 100% of the profits
- Low regulation
Cons:
- You have unlimited personal liability for the activities of the business. This means that creditors could go after your personal assets.
- You are limited by your own ability and assets to raise capital
- The operation of your business is solely dependent on you
Partnership
In a partnership, you and the other partners combine financial resources and share in the profits and losses associated with the business. It’s important to write a partnership agreement that outlines the partnership structure and the rights and responsibilities of each party. You can also be a limited liability partner meaning that you aren’t involved in the management of the business and are only liable for the debts to a certain extent.
Pros:
- Easy to create
- You share the financial start-up burden among partners
- You share the responsibilities and liabilities of the business
Cons:
- All partners are still personally liable for any debts or other liabilities of the business
- All partners are financially responsible for decisions made by another partner
- There is potential for conflict between partners and it can be hard to dissolve the partnership
Corporations
This is the most common form of a business organization and it separates the business as a legal entity from the owner, protecting the owner’s personal assets from the business. The corporation is owned by shareholders and they appoint directors to be responsible for running the company.
Pros:
- Limited liability for the owner as the business is now a separate legal entity
- Ability to raise capital through the sale of stock
- Potential financial benefits such as tax advantages
Cons:
- More complicated and expensive to start up
- Strictly regulated
- More reporting and filing requirements
For more information on the advantages and disadvantages of each structure, including tax implications visit here. If you have any questions regarding how each structure would affect your insurance policy or if you have any other questions, the brokers at Bullfrog Insurance are here to help.