How to Choose the Legal Entity for Your Startup

The legal entity that you pick for your startup can affect your liability protection, taxes, management structure and other things. Here we will briefly review the common types of legal entities, considerations when selecting a legal entity, some comparisons between legal entities, and give a quick checklist about how to pick a legal entity for your business.

Regarding considerations when choosing a legal entity for your startup, there are several to keep in mind such as the following:

• Liability protection: Legal entities offer varying degrees of liability protection for business owners. For example, generally a sole proprietorship provides no protection, while a limited liability company (LLC) and a corporation offer significant protection.
• Tax: The way a legal entity is taxed can impact your bottom line. For example, a sole proprietorship is not taxed separately from the owner, while a C corporation is taxed as a separate entity or subject to “double taxation” (compared to an LLC or S corporation).
• Management and ownership: Ownership and management structures differ for different legal entities. For instance, a partnership generally involves two or more owners sharing management responsibilities and profits, while a corporation has shareholders who elect a board of directors to oversee management.
• Funding and growth: Different legal entities may impact a startup’s ability to raise funds and grow. For instance, a corporation may have more opportunities to raise funds through stock offerings, while a sole proprietorship could be limited to personal funds and loans.

There are multiple types of legal entities to consider, including the following, which may have different varieties of their own:

• Sole Proprietorship: This is the simplest legal entity for small businesses. One person owns and runs the business. The owner and the business entity are not legally separated. This type of business is easy and inexpensive to set up, but potential drawbacks include a lack of liability protection for the owner and limited funding potential compared to other options.
• Partnership: A partnership involves two or more owners (i.e., partners) who share management responsibilities and profits. It is easier to set up than other options, but liability protection for one or more partners may be limited and there can be difficulties regarding dissolution of the business. There are multiple forms of partnerships such as the following summarized generally:
  • general partnership: all partners manage the business and are personally liable for the business’ debts;
  • limited liability partnership (LLP): partners may have some limitation of their liability;
  • limited partnership (LP): general partners manage the business and limited partners do not manage in exchange for limited liability; and
  • limited liability limited partnership (LLLP): a type of limited partnership where general partners have limited liability.
• Limited Liability Company (LLC): A LLC offers personal liability protection, flexible management structures, and favorable tax treatment. However, it can be more complex and expensive to set up and for compliance than a sole proprietorship or corporation, for example, and the LLC is a relatively new entity so there can be more uncertainty/inconsistency on the law.
• Corporation: A corporation generally provides the most liability protection and funding potential through stock offerings, and is less expensive to establish and maintain than a LLC, for example. However, it can be complex to maintain corporate formalities, to transfer ownership, and there are various restrictions on a S-corporation.

To decide which legal entity type is the best fit for your startup, you can consider liability, tax, management, ownership, funding, and growth issues, and the advantages and disadvantages of each business entity type. The following general checklist can be used as a starting point to help guide the decision-making process:

1. Liability protection: How important is protecting personal assets from business debts and legal actions?
2. Tax: What structure is the most tax-efficient, considering the business’ income, deductions, and credits?
3. Management and ownership: Who will manage the business and how will the ownership be allocated?
4. Funding and growth potential: What are the startup’s funding needs and growth plans, and which legal entity type best facilitates these goals?

In summary, a limited liability limited partnership in Florida offers certain benefits to businesses such as a liability shield to general partners and pass-through taxation. Consulting with a Florida corporate lawyer may help you understand the requirements and implications of a limited liability limited partnership in Florida. Click here to contact Guala Law Firm if you need legal advice or assistance.