Management Practices

Structuring Your Business

Stacey Soble | October 16, 2015 | 6:11 PM

For any successful business, the first step is choosing the legal business structure. The proper legal foundation for a business structure protects the owner's hard work. The owner's decision impacts the business's tax liability, the owner's personal liability, and restrictions on capital generation. Bottom line: The proper business structure maximizes profit and limits your exposure to liability.

Choosing the right business structure is not as simple as filling out a generic form. Businesses must choose from several complex structure models like:

1. Corporation (S-type or C-type)

2. Limited Liability Company (LLC)

3. Limited Liability Partnership (LLP)

4. Sole Proprietor, etc.

All these various structures possess complicated liability, tax, and legal requirements. And, since each business owner styles their business to their own, unique fashion, each business must consider what business structure is most beneficial to them.

For instance, if you choose Sole Proprietor as your business structure then you are legally tied to your business. This legal marriage to your business means you are liable for all of the business obligations, which puts personal assets like your car, house, and money at risk during a lawsuit. On the other hand, an LLC protects your personal assets during a lawsuit against your business.

No matter how big or small your company, when choosing your business structure, contemplate these factors:

1. Legal liability;

2. Future growth;

3. Formation cost and continuous oversight fees.

As to number one, an ounce of medicine is worth a pound of cure. Liabilities will arise during the course business. The proper business structure can prevent those liabilities from becoming costly problems – costly problems that could drown your business. Because each business's assets, visions, and size are unique, each business must decide what business structure best protects them from liabilities.

Second, the proper business structure facilitates business growth. Your business has practical, real-life, business realities, not just legal requirements. As your business grows, the practical realities of your business change. Your priorities shift. Employees come and go. Assets are acquired and loans are obtained. Tax structures adjust. As the seas of your business ebb and flow, the proper business structure can stabilize the foundation of your business. Don't take choosing a business structure lightly because it affects the business decisions you can and cannot make in the future.

Third, the time-consuming nature of registering and filing your business structure can be costly.

In addition to the costs, the confusing legalese makes the process complicated and burdensome. But, don't sleep on this process. With each business structure there is a different set of legal obligations for record-keeping and administration. Further, each business structure carries unique tax implications. The bottom line: Even though the filing process is burdensome, don't overlook the importance of your business structure because it carries future financial consequences.

Matthew Walsh is a Chicago-based senior partner at Hinshaw & Culbertson LLP, a full-service national law firm with more than 500 lawyers. He represents hair care industry clients—and businesses around the country—in litigated and other legal matters, including business, employment and product-related disputes, and in contract negotiations.

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