What Is The Right Legal Entity For Your Business?
Are you thinking of taking your business to the next level? Maybe you’ve been running it as a sole proprietor for a while now, and want to separate personal and business assets – and risks.
Determining the legal structure of your business is your next important decision.
But what is the right or “best” choice of vehicle?
The legal entity that is best for you will depend on the type of business you have an
d how you plan to grow.
The three main business entity types include:
Sole Proprietorship
If you have no co-founders and will be working alone – and you don’t need limited liability – you may not need to create a legal entity at all. Anyone who does business without formally creating an organization is a sole proprietor. You are the business. And you will be fully responsible for all debts and obligations of the business.
Advantages:
- Simple and inexpensive.
- Complete control over all decisions.
- The greatest freedom from regulation.
- Straightforward taxes.
Disadvantages:
- Unlimited personal liability. For example, a creditor filing a claim against your business will have a right against your assets – business or personal.
- Lack of continuity in business organization (if the business owner dies, becomes disabled, or is otherwise absent).
- Perception of lack of sophistication.
- No name protection unless you register a Master Business Licence or trade-mark.
Partnerships
A partnership arises where two or more persons carry on business together for profit. There are general partnerships, limited partnerships, and limited liability partnerships.
In a general partnership, you and one or more owners share the management of the business. Each partner would be personally liable for all debts and obligations of the partnership, and each partner is responsible for, and assumes, the consequences of the actions of the other partners.
A limited partnership has one or more limited partners and one general partner. The limited partners put money in the business, but do not participate in running the business. Limited partners have limited liability to the extent of their investment in the partnership. As such, creditors cannot go after the personal assets of the limited partners. The general partner, however, remains responsible for the partnership’s debts.
Limited liability partnerships are a hybrid of these first two partnerships. In a limited liability partnership, liability of the limited partners is restricted to claims for negligent acts or omissions. This is useful for professional partnerships (lawyers, doctors, accountants, etc.), where it’s possible that one partner may not be aware of the work performed by another partner, and whether that work is negligent.
Advantages:
- Relatively easy to set up.
- Low start-up costs.
- Limited regulation.
Disadvantages:
- Unlimited liability (for general partnerships).
- No separate legal status apart from its partners. Partners can legally bind each other without prior approval (for general partnerships).
- Divided authority.
- Lack of continuity.
- No name protection.
Corporations
If your company is entering into contracts (hiring employees, making purchases, etc.), you probably want to create an entity that can sign these contracts. A corporation is a legal entity that is separate and distinct from its members. This makes for limited liability, which means you will not be personally liable for debts and claims of the business. There is also the option of creating a professional corporation, which is suitable for doctors, lawyers, accountants, and other professionals.
Advantages:
- Limited liability.
- Possible tax advantages.
- Transferable ownership.
- Perpetual existence.
- Separate legal entity.
- Easier to raise capital.
- Name protection.
Disadvantages:
- Higher startup and ongoing costs.
- Subject to more government regulation.
- Greater record-keeping requirements.
- Shareholders (directors) may be held legally responsible in certain circumstances.
Contact An Experienced Corporate Lawyer Today
Anton M. Katz, Barrister & Solicitor has 22 years of corporate law and commercial litigation experience. If you want to learn more about the pros and cons of each type of legal entity, or find out which vehicle may be best for you based on your objectives, contact our office today for your free initial consultation. We look forward to hearing from you.
