Choosing a Legal Format

Prerequisites: Basic Business Concepts

The following course is based on U.S. business structures, although the principles it teaches in how to compare legal formats can be applied in any country.

Introduction

This course is intended to give you the basic knowledge you need to legally run your business in the format that is most advantageous for current and future situations. New entrepreneurs are often so excited to get started with their new business, that they do not research how to best set up their business to control costs.

The biggest cost that can be controlled by the proper legal format is the amount of money that becomes taxable income under federal, state, province, local and - in some cases - foreign laws. Therefore, it is essential that the businessperson understand tax treatments before deciding on their legal form.

While this course will concentrate on the legal formats and tax treatments that are used in the United States of America, the principles we will discuss can be transferred to whichever region of the globe that you reside in that allows a free market system and imposes taxes. 

The course is divided into the following sections:
  • Sole Proprietorship
  • C Corporations
  • S Corporations
  • General Partnerships
  • Limited Partnerships
  • Limited Liability Linked Partnerships
  • Limited Liability Companies
  • Summary

There is no single form of business that is right for all situations, although certain types of businesses gravitate toward certain formats. There are also different formats available in different states, as well as federal classifications, that have to be considered.

The two basic factors that you are trying to achieve are:
  1. The degree you want to limit your personal liability from business activities; and
  2. The impact of taxes on your profit margin.

Other factors to consider are the cost of forming and operating the business, the flexibility you may need, the number of owners and the ability to select different tax treatments at the state and federal level. More on that later.