Starting a new business is exciting, with many key decisions ahead. What will the business be called? Will you have a logo and a tag line? Who will be part of the team? Legal structuring decisions are generally not at the top of the list but one of the most crucial decisions is which legal entity should you choose?

You might be familiar with terms like, sole proprietorships, partnerships, and corporations but may not know which one suits your business best. This guide provides an overview of the most common structures for new companies. Naturally, each business has its unique objectives and requirements, and the optimal structure for your venture will depend on a variety of factors.

Sole Proprietorships

A sole proprietorship represents the most basic type of business entity. In this structure, the business is not a separate legal entity, which results in unlimited liability for the owner. Consequently, if the business incurs debts or other obligations, the owner is personally responsible. Despite this, sole proprietorships are relatively easy and cost-effective to establish, with business income reported directly on the owner's tax return. Additionally, there is no requirement to register the business name if it operates under the owner's name.

Sole proprietorships are ideal for single-owner small businesses that don't plan to grow beyond a single employee or take on major liabilities.

Partnerships

If your new venture includes several individuals, forming a partnership might be an option. In a partnership, the business does not possess its own legal identity. Consequently, the partnership cannot legally enter contracts or hire employees under its own name; only the partners themselves can undertake these actions.

However, partnerships offer certain tax benefits because profits and losses pass directly to each partner, and they tend to be simpler to manage compared to a corporation.

There are three basic types of partnerships:

• General Partnerships: All partners share liability for the business’s debts and obligations. This implies that if one partner takes on debt or obligations for the partnership, all other partners also become responsible.
• Limited Partnerships: Limited Partnerships consist of two partner types: general partners and limited partners. General partners handle the business operations and are responsible for its debts and liabilities. Limited partners do not manage the business and are not accountable for its debts or liabilities.
• Limited Liability Partnerships (LLPs): LLPs are tailored for "professionals" such as accountants or lawyers. In an LLP, each partner is typically responsible only for their own acts of negligence.

Corporations

Startups frequently choose to incorporate. By forming a corporation, the founders enjoy significant liability protection. A corporation functions as a separate legal entity, providing limited liability to its shareholders. This means that shareholders' liability is confined to the value of their shares, and they do not bear responsibility for the corporation's debts and obligations. Additionally, corporations benefit from a lower tax rate compared to individuals, though corporate income is subject to double taxation—once when the corporation earns income and again when dividends are paid to shareholders.

However, forming a corporation can be expensive and involves numerous legal requirements. For instance, the incorporation process requires naming the corporation, drafting articles of incorporation, establishing the initial registered office and board of directors and filing information on individuals (shareholders) with significant control. Furthermore, the corporation is required to file annual corporate tax returns and hold yearly shareholder meetings.

For startups aiming to grow into large corporations employing a significant number of people, incorporation is essential. Although managing an incorporated business requires more effort, the incorporation shields the founders from personal liability. Equally important, for startups looking to raise equity financing, the company will be required to incorporate in order to issue shares to the investors.

Other Entities

There are other types of business entities that might be applicable to new businesses depending on their overall goals including Not- for-Profit Organizations (NPOs), cooperatives and joint-ventures.

How MT❯Ventures Can Help

Every new business has its own unique needs starting with choosing the right legal structure tailored to its specific goals. At MT❯Ventures, we strive to provide the legal smarts and strategic counsel that startups need to help you grow and focus on the vision. We will guide you through selecting the appropriate legal structure and understanding the funding landscape, helping you capitalize on your biggest opportunities and tackle the challenges you'll face on your entrepreneurial path.