If you’re beginning to start a new small business, your mind is probably focused on your products or services, your potential customers and the various logistics of getting your company off the ground. These are all important topics, and it is perfectly understandable that you should be preoccupied with them. However, it’s also important for you to take some time to make sure you get the fundamentals right, and choose the business structure that suits your company’s needs.
In this blog post, we will take a brief look at the most common legal structures for business entities.
Sole proprietorship and general partnership
The most straightforward business structures recognized by Indiana law are the sole proprietorship and the general partnership. These are considered informal because they do not require filing paperwork with the Indiana Secretary of State’s office.
The definition of a sole proprietorship is simple: One person who owns and operates a business for profit. The definition of a partnership is similarly simple: Two or more people who own and operate a business for profit.
The simplicity of these structures has its advantages, but, compared to more formal structures, they have some serious potential downsides.
Most notably, the owner of one these businesses is held liable for all the business’ debts. The business’ income is reported as the owner’s personal income.
While these businesses do not necessarily have to register with the state, it’s wise for the co-owners of a general partnership to write up an agreement between the partners in order to formalize their rights and responsibilities.
Formal entities
Owners who would like more protection for their personal finances can choose a structure such as a Limited Liability Company (LLC) or a corporation. These types of business require registration with the state.
Compared to the informal structures, LLCs offer greater distance between the owners’ finances and those of the business itself. The company’s income is taxed separately from the owners’ personal income, and the owners are protected to some degree from the company’s debts and other liabilities.
It’s wise for the co-owners of LLCs to have an operating agreement in place. This is similar to an agreement in a general partnership.
Those who desire even more protection for their personal finances may consider a corporation. Under this structure, the business is owned by shareholders, who are protected from liability from the corporation’s debts.
Compared to the other entity types, the great disadvantage of corporations is their complexity. Setting up a corporation requires registering articles of incorporation with the state, along with ongoing reporting responsibilities and more.