Choosing the right legal structure for a business is a crucial step that helps create a solid foundation as part of strategic business solutions. Doing so helps save money and protect personal assets. In addition, it allows your startup to operate more efficiently and boost the ability to raise funding.
The preferred structure determines the amount of paperwork involved in the registration process. On the other hand, seeking assistance from a consultant, attorney or accountant enables you to make an informed choice.
When it comes to partnerships, you have three options: general partnerships, joint ventures and limited partnerships. Each comes with distinct benefits and downsides.
Joint ventures — this option gives you an opportunity to operate as a general partnership for a single project or limited time. Limited partnerships — they come with limited liability for one or more limited partners. On the other hand, one or more general partners assume liability for the entity’s debts and operational risks. The legal and shareholding status of partners affects level of input in relation to decision-making. State law places a number of restrictions on management and control of these entities.
General partnership — easy to form and allows partners to share duties, profits and liability. A partnership agreement documents various operational aspects, including decision-making processes, disbursement of profits and more.
A partnership must be registered with the state and the Internal Revenue Service (IRS). Although the business itself does not pay taxes, an annual information return needs to be filed. It reports losses, gains, income and deductions. In turn, the partners are responsible for reporting their share of loss or income through personal tax returns.
The continued existence of the partnership is determined by the willingness of partners to remain operational. The partnership agreement covers this aspect by stipulating whether it continues in the event of one or more partners’ death or departure. In some cases, it allows the departing partner to sell their shares.
Pros – The entities benefit from the complementary skills of all partners, provides flexibility when compiling the agreement, easy and inexpensive to form. It helps avoid double taxation and comes with minimal legal formalities.
Cons – Partnership may have to be dissolved when a general partner passes away, general partners assume unlimited liability and the involvement of multiple partners creates potential for disagreements. In many states, partnership shares may not be transferred or sold without the consent of all parties.
Sole proprietorship – This option eliminates the need to work and share profits with one or more partners. As a sole proprietor, you handle the daily operational responsibilities in various capacities.
