Starting a business is a noble thing to do, it sends a message that you believe in yourself and your idea like no other. However, knowing where to start is the difficult part of any company’s first few days. To help you get started, here we are going to look at some of the different legal structures that you will need to know to get going.
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What is a legal structure?
Also known as a business ownership structure, the legal structure determines some of the key components of your company such as financial liability and tax rules. Below we will go through four of the structures available and outline their pros and cons. Regardless of which you choose make sure you are familiar with their tax rules to avoid HMRC investigations or their equivalent where you are based.
A corporation is first and foremost separate from its owner, meaning the liability does not lie with the person who founded or who currently owns the business. A corporation can also raise funds through stock options, meaning there is a specific structure to a corporation which differs from other business structures. That is as follows:
- Directors appointed by shareholders
- Officers employed by directors
- Officers take care of the day-to-day operations
The positives with starting a corporation do come down to who is ultimately liable for the company’s debts and legal issues, which differ under different types of ownership models. The cons include double taxation which means personal income tax and corporate tax are both paid.
A c-corporation can decide, after it has been set up, to transition itself into an s-corporation for the benefit of not paying double taxation. Under this structure shareholders can take income and losses of the business and write them off under the own income tax and the business is no taxed at corporate level.
Cons of s-corps include stricter rules such as limitations on shareholders and restrictions on expenses for things like healthcare and travel.
A limited liability company (LLC) takes some of the benefits of corporations and sole-ownership and combines them into one structure. For example, the owner of an LLC is not solely responsible for the company’s debts and liabilities. In addition, the owner can also have profits and losses added to their personal tax return.
An LLC at its core relies on an operating agreement that sets out the financial and functional decisions such as rules of business, provisions, and regulations. Over 80% of business chooses to go down the LLC route because of the tax options as well as the liability factor. However, it does have cons such as being more expensive than a DBA and set up in a much more formal manner.
Otherwise known as Do Business As (DBA), a sole-proprietorship is the legal name given to a business that is operating under a different name from the owner; however the owner is still liable for all of the business including debts. A DBA is often regarded as one of the easiest business structures to operate but can put some off due to the legal obligations of the owner.