Choosing a legal structure, such as an LLC (Limited Liability Company) or a corporation, serves as a protective barrier, separating personal assets from business debts and legal obligations. ~ Andy Gillin, Founding Partner and Attorney, GJEL Accident Attorneys
Navigating the complexities of business formation can be daunting for entrepreneurs, which is why we’ve gathered insights from seasoned legal experts on this critical issue. From considering state registration privacy to balancing taxes and liability protection, discover the eight key legal considerations these attorneys and business founders believe every entrepreneur should weigh when selecting a business structure.
- Consider State Registration Privacy
- Understand Liability Implications
- Assess Flexibility in Fiduciary Frameworks
- Evaluate Equity and Transfer Restrictions
- Adhere to Data Privacy Laws
- Align Structure with Employee Types
- Select Structure for Growth and Investment
- Balance Taxes and Liability Protection
Consider State Registration Privacy
Entrepreneurs should consider the state where they register their business. If an entrepreneur intends to keep their identity as the business owner confidential, then the entrepreneur should only register their business in a jurisdiction that allows for confidential ownership of LLCs and corporations. Some states allow this—such as Delaware, Nevada, and New Mexico—but other states require disclosure of business ownership to a public database.
Understand Liability Implications
From my entrepreneurial journey, a crucial legal consideration when selecting a business structure is understanding the liability implications. Opting for a structure that shields personal assets from business liabilities is not just a legal maneuver; it’s a human-centric decision that safeguards personal financial security. As the founder of a startup, I’ve realized the importance of limiting personal liability, especially in the unpredictable world of business.
Choosing a legal structure, such as an LLC (Limited Liability Company) or a corporation, serves as a protective barrier, separating personal assets from business debts and legal obligations. This decision is not just about legal formalities; it’s about creating a safety net that allows entrepreneurs to take calculated risks without jeopardizing their personal well-being.
By recognizing the human side of liability protection, entrepreneurs can embark on their business endeavors with a sense of security, enabling them to focus on innovation and growth while mitigating personal financial risks.
Assess Flexibility in Fiduciary Frameworks
I’ve learned that one pivotal legal aspect to consider when choosing a business structure is flexibility in fiduciary frameworks.
For instance, I initially set up my business as a sole proprietorship. It was a straightforward choice, quick to establish, and gave me direct control. However, as the business expanded, I faced limitations in fundraising and personal liability issues. This experience led me to transition to a limited liability company (LLC).
This shift offered a balanced blend of legal protection and operational flexibility, crucial for adapting to the dynamic market of outdoor fitness equipment. It’s a lesson in how the right structure can pivotally shape your business journey.
Evaluate Equity and Transfer Restrictions
The significance and relevance of the legal differences between entity structures often depend on the owners and their long-term objectives.
One of the most important factors to consider is the form of equity and the restrictions imposed on equity transfers. Some structures permit multiple classes of shares to represent owners’ equity, while other structures do not differentiate between owners in the same way. Likewise, the transferability of owner equity varies between entity types.
Selecting the right structure and then including desirable provisions in the entity’s operating documents is one of the essential considerations to take into account.
Adhere to Data Privacy Laws
Entrepreneurs and business leaders dealing with customer data must consider the legal parameters surrounding data usage, storage, and distribution. They should be aware of lawful practices pertaining to consumer data to steer clear of legal ramifications down the line.
As a data consultant, I must be mindful of the legal considerations surrounding my clients’ data privacy and data security. Any unlawful breach of their data could backfire on me due to command responsibility.
Align Structure with Employee Types
The type of employees you have will be a big indicator of which business structure is best for you. If you have W-2 employees (i.e., those who are considered “regular” employees), then you’ll have to adhere to a lot of labor laws that dictate how you structure your company. These include minimum wages, overtime pay, employee benefits, etc. This may make S-Corp and C-Corp structures less desirable, as you’ll have to pay for a lot of extra costs.
If you have 1099 contractors, then you can structure your company however you want. You won’t have to worry about any of the labor laws that govern regular employees, which makes it much easier to choose a business structure like an LLC or S-Corp.
Select Structure for Growth and Investment
One key legal consideration for entrepreneurs starting a business is understanding how different business structures impact future growth and investment opportunities. For instance, if you’re looking to attract investors or venture capital, a corporation, particularly a C-corporation, might be more favorable due to its structure and ability to issue shares.
On the other hand, an LLC might be more suitable for those seeking operational flexibility and pass-through taxation. Choosing a business structure that is in line with your long-term business objectives will create the right foundation, as it will directly affect important areas such as the ability to scale, find investors, or manage taxes.
Balance Taxes and Liability Protection
Taxes and liability are two of the most important legal considerations when forming a business. If structured correctly, your business structure should help you avoid unnecessary tax burdens while also protecting you from some personal liabilities. However, regardless of the structure, liability insurance is still necessary for all small businesses, even if you have formed an LLC or corporation.