Key considerations when choosing a business structure

On Behalf of | Jul 12, 2023 | BUSINESS & COMMERCIAL LAW - Business Formation & Planning

When setting up a business, the first step is choosing the appropriate business structure for the company. If you want to establish your business in Texas, you can form a sole proprietorship, partnership, LLC or corporation. While other alternative structures exist, these four are common among business owners. The selection process, however, can be overwhelming, especially for a first-time business owner.

Here are three key factors that will play a crucial role when choosing which structure is best for your business.

Ownership and management plans

As simple as it may seem, the number of owners can narrow down business structure options. For instance, a single owner cannot form a partnership, while two or more owners cannot establish a sole proprietorship. Moreover, management plans, such as acquiring investors and offering company shares, will also influence your structure choice.

Tax considerations

A company’s business structure also determines its tax liability and filing process. In sole proprietorships and general partnerships, owners have to report the business’s profits and losses on their personal tax returns. Corporation owners, however, have to file their personal and business taxes separately, subjecting them to double taxation. Compared to the other three, LLCs are flexible in choosing if they prefer to be taxed as a partnership or corporation.

Liability protection

Companies incur debts and liabilities in the course of operating their businesses. And a company’s business structure will dictate whether owners will be personally liable for these debts. Owners of sole proprietorships and partnerships are the same legal entities as their businesses. This means they will be personally responsible for the business’s debts. Contrarily, LLCs and corporations are separate entities, so their owners have limited personal liability.

Each business structure is unique and only through these considerations will an owner determine which suits their business. It is essential to carefully review your goals and priorities and ensure they align with your selected business structure. Moreover, having a legal professional review your business formation plans can help you establish a solid foundation for your business.