Before going ahead with that new business plan for your start-up, ensure you know all legalities involved, especially the different types of business structures available. The law surrounding each entity can differ from state to state (and country to country!) but generally the rules and regulations are quite similar. However, it is a good idea to seek legal advice beforehand so you are fully aware of the risks involved. Below are some of the advantages and disadvantages of starting up a business as a corporation, limited liability company (LLC) or partnership.
Starting up as a… Corporation (equivalent to a limited company)
Setting up a corporation can be the preferred (and most beneficial) structure for employers looking to take on a large team of staff and have maximum legal protection. This type of business structure is owned by shareholders and has a board of directors.
Pros: A corporation is its own separate legal entity and is responsible for its own debt in insolvent situations, like administration or liquidation. This means, you, as a director, are protected if the corporation struggles financially.
It’s important to remember that the business owes money, not the director. If, however, directors have acted fraudulently, they will be exposed to the corporation’s liability.
Cons: There can be a lot of paperwork and filing of accounts when setting up a corporation, however this ensures everything is kept up to date and regulations as well as compliance are met. There are also higher tax fees which leads to more expensive accountancy fees.
Starting up as a… Limited Liability Company (LLC)
An LLC is a business structure that has more flexibility when it comes to taxes and regulations and is usually a good fit for small businesses. LLCs are owned by its members.
Pros: Like a corporation, you are protected against personal liability if the company enters insolvency. There is less paperwork to do as the structure is based around an informal agreement can be made when starting up and often adapted later on. An LLC can also choose how the business should be taxed
Cons: This type of entity is a fairly new structure and could be less favored than that of the ‘wise’ corporation structure. With perhaps an unfamiliar set up, investors may be more reluctant to lend.
Starting up as a… Partnership
As the name suggests, this business structure is set up with two or more partners and follows different common laws across the nation. However, there are some general rules that apply.
Pros: As structures get smaller in business size, so does the paperwork and filing of accounts. There are also fewer taxes to pay.
Cons: The big disadvantage of being in a partnership is you are personally liable for the partnership’s debt if the business falls in financial difficulty. Every partner is responsible for the entire debt, so if one partner is unable to afford the debt, creditors will look to the next partner and so on. Before going into this kind of business, drawing up a contract deeming who is liable for what is essential.
There is the option of setting up a Limited Liability Partnership (LLP). This type of formation can differ in law from state to state but is similar to a partnership. It does, however, offer more legal protection to partners if LLP becomes insolvent, hence limited liability. An LLP is essentially a cross between a partnership and a limited liability company.
Remember, you can change structures down the line if you want to. If you are unsure what the best plan of action is, be sure to get legal advice specific to your situation.
Keith Steven of KSA Group Ltd has been rescuing and turning around businesses for over 20 years and has worked with insolvency firms, turnaround funds and venture capital investors. He is also author of the site www.companyrescue.co.uk. You can follow Keith on Google+.