Legal Structures for Your Small Business

There are several advantages and disadvantages to starting a business. One of the greatest advantages of starting a business is that it almost has a life of its own and it can evolve into many different shapes. A business has a personality, and that personality manifests itself through its legal structure. Choosing how to structure your business is very important. There are 3 ways that you can structure your business.

The first way that you can structure your business is through a sole proprietorship. It is the simplest and easiest to understand. Basically, you just set up shop and go to work. What you make is what you earn. Every cent passes through your pocket and the IRS demands that you show it that way. The nice thing is that you can spend your money when and where you want to.

The next way that people structure their businesses is through a corporation. I think that corporations are really neat because they create a "second person". They can do pretty much anything that a human being can do except for breathe. They have all the same rights that a human does under law. And so any money that the corporation makes belongs to the corporation. This means that you can't just take it and buy a new fishing boat for yourself. You have to make sure that you follow lots of rules dealing with that money.

Why would you want to use a corporation? Tax advantages. By setting up a separate entity than yourself you can structure the money so that you minimize how much taxes you payout. For example take AIG. They pay out huge bonuses to executives, because it gets rid of money from the company coffers and they don't have to pay taxes on it. The employees are usually taxed at a lower rate and so uncle Sam ends up taking a smaller cut. You can do the exact same thing. Just follow all of the laws, and the government can't touch you.

Also if somebody decides to sue you, the corporation will take the hit. Remember that you are not your corporation. So somebody needs to sue you personally or the corporation. Either way you protect important assets. They can't shut down your company if they sue you, and they can't take your house if they sue your company. So it provides protection.

The last way to set up your business is to make an LLC, or limited liability company. An LLC gives you many of the same advantages that a corporation does.The company is not you, so lawsuits can't touch your personal property. Except that the money goes straight to your pocket. LLCs are the new kid. They aren't exactly stable and lots of laws are still being written about them.

This article was just meant to discuss the advantages for each form of ownership. It is beyond the scope of this article to provide any sort of legal advice but rather make you aware of the forms of ownership available to you. Contact a lawyer for legal advice.