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When the process of starting a business is in question, there is a million little things to consider, but choosing the appropriate entity is not a small thing and it is actually very important. Entity is the way in which your enterprise will be legally treated in the future,...Read More
When the process of starting a business is in question, there is a million little things to consider, but choosing the appropriate entity is not a small thing and it is actually very important. Entity is the way in which your enterprise will be legally treated in the future, and this fact can also affect your personal funds and private accounts if not done right. Lawyers and similar experts should always be consulted when starting a business, since they are the ones who should know more about the subject and they should be able to provide their clients with appropriate legal advice and proper guidance.
There are several types of legal entities when it comes to enterprises and business projects, and owners can register them as sole proprietors, partnerships, LLC enterprises or as corporations. All of these types have their specific purposes and all come with pros and cons, which means that this step is very important when starting a business.
Sole proprietor is the most common type and it is used generally for smaller businesses. This type of entity is the oldest and it is used when owners want to have the same identity with their enterprise, and they manage a company completely on their own. Positive aspects of this arrangement are that it is easy to setup and maintain, and it demands relatively lower costs to operate the business. Downsides include unlimited personal liability and the fact that this type usually has problems when attracting potential investors.
Partnership is a type of entity which involves two or more parties which run the business together and they share all liability, profits, debt and similar aspects of running an enterprise. This highly adaptable type can be established very easily and it also has low operational costs, but is has a drawback which comes out when company is not doing so well, or when your partner does something wrong and you have to pay his share as well.
LLC is a very common type of business entity, and this one is perfect when owners want to attract investors and when they want to have limited personal liability. There is no corporate tax payed with this type of entity, and operating agreement is usually signed when this kind of enterprise is started.
Corporation is similar to LLC in some aspects, but shareholders and board of directors are distinguishing elements of this type of legal entity. Stringent record keeping and larger administration are a part of this arrangement, and limited personal liability is also a part of this entity.
When it comes to other legal requirements, EIN numbers are not obligatory for sole proprietors, but they are strongly recommended, while all other types must have this number. Also, bank accounts are not required for sole proprietor and partnerships, but they are also recommended by all experts and experienced businessmen. Business licenses are a must for all these types of entities as well.