Choosing the Best Legal Structure for Your New Practice
Some parts of setting up a new business are fun – choosing a name, picking out equipment or furniture, etc. Other parts may not be as much fun but are necessary.
Posted in Risk Management on Monday, October 15, 2018
Some parts of setting up a new business are fun – choosing a name, picking out equipment or furniture, etc. Other parts may not be as much fun but are necessary. One that’s very important is deciding the best legal structure for your practice.
Unfortunately, there isn’t a one-size-fits-all solution. There are many issues to consider, including the laws of your state. Any decision regarding how you structure your practice should be made with sound advice from your attorney and/or accountant.
That doesn’t mean you shouldn’t educate yourself before you have those conversations. It will help you identify questions to ask, and save time the advisor would need to spend educating you about business structure options – time you will be billed for.
There are four main types of structure:
- Sole proprietorship. This is the simplest form, but also makes the owner liable for the financial responsibilities of the company.
- Partnership. Tax burdens from profits are passed through to partners on their individual returns. However, each partner is personally liable for the business’s financial obligations.
- Corporation. This is an entity formed to conduct business. The corporation can be taxed and can be held legally liable for its actions. This structure has significant recordkeeping requirements.
- A limited liability company, which is a hybrid. It passes profits through to the owners for tax purposes but protects them from personal liability for financial obligations.
Here are some things to think about before you schedule a sit-down meeting with your attorney or accountant to discuss the right structure for you:
- Legal liability. Of course, you don’t want to be personally liable for business outcomes. Incorporation can put a barrier of separation between you and the business.
- Tax implications. No one wants to pay more taxes than necessary. Some business structures provide greater tax savings than others.
- Costs. Some business entity types require more ongoing action than others. You may spend more on recordkeeping and filing fees than what you save, depending on your unique situation.
- Future. Where do you see yourself in five years? If you’re planning to go solo for the long term, the best business structure might be different than if your master plan is to grow to multiple locations with lots of employees. You can change your mind down the road, but if you already have long-term goals, share them with your professional advisors.
Deciding what structure is right for you will depend on your personal needs, your business goals and the laws of your state. Each situation is unique and business structure should be determined with guidance from your attorney or accountant.
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