You want to start a business! What kind of a legal entity will you form?

Perhaps you know what you want to do, what you want to sell, what type of service you want to offer, and where you want to retire when you make your first million . . . . . . but what kind of a legal entity do you want to form? It is the legal entity that you choose as the foundation of your business that will allow you to reach your goals.

Choosing the right legal entity can be a challenging, overwhelming, and daunting task full of legal jargon with what might appear to be little or no guidance and direction available outside of sitting in a lawyer’s office for hours on end. Perhaps this is the reason why most start-up businesses begin without choosing and considering their very foundation. The problem with ignoring this most basic step of business planning is that once this step is overlooked, it is often rare that a business owner will return to this stage of planning until after a legal “incident” has forced them to review their business structure. This “incident” usually results in greater costs and expenses both financially and emotionally when business formation is considered after the fact rather than if it is considered, planned, and put in place at the beginning of your business venture.

So what are your options? The most common forms of business entities are sole proprietorships, partnerships, corporations, and limited liability companies. A sole proprietorship is a business owned by a single person and the owner is referred to as self-employed. A partnership is comprised of one or more partners. Partnerships can be either general partnerships or limited partnerships depending on the investments and participation of the partners. A corporation is separate legal entity that can own property, enter into contracts, sue and be sued, and can offer protection to the owners’ personal assets. A limited liability company is a newer form of business with features similar to a corporation but generally can allow more flexibility in regards to the number and qualifications of owners.

the right entity for you should not be an overwhelming task. It simply requires that you consider your business plans now and in the future. You want to select the entity that allows you to grow in the direction that you want your business to expand. You must consider the nature of your business, number of participants in your business, taxes, insurance, asset protection, the anticipated duration of your business, and the legal requirements, if any, associated with the form of the entity you select. For example, if you are building a business that you intend to leave as a legacy for your children and grandchildren to run, you may want to select an entity with flexibility to survive over time. Thus, a corporation might be the right choice for you. Other issues to consider when selecting your entity include whether your business is service oriented, whether you are a licensed professional, and whether you own property or other assets. Each of these factors has implications that would be wise to review with a professional. It is also a good idea to ask your fellow business owners what has worked for them.

No matter what entity is right for you, remember the golden rule. Make sure you follow the rules and regulations associated with the legal entity that you choose so you can take advantage of all of the advantages your planning, preparation, and research has to offer.

This is one in a series of articles that address the most common areas of interest for small, start up, and growing businesses.

This web site is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

Law Office of Cristi L. Michelon | 132 E. Figuero Street | Santa Barbara, CA 93101 | (805) 882-2226 / (805) 882-2227 (fax)