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The kind of legal formation you select for your business can have a most important influence on the success or failure of your venture. This is because your ability to take decisions quickly, to compete in the market-place and raise additional capital if required is directly connected to the legal makeup of that business.

There are basically three legal structures to pick from: sole proprietorship, partnership and corporation or limited company. No one type is better than another per se, because each has its own peculiar advantages and disadvantages. Therefore, what is important is to select the legal structure that is best for you.

There are several questions that you should ask yourself to help you decide which form of business to choose. What do I already know about this type of business? In which ares of the business will I need help? How much money will I need to get started? Where will I be able to get money from, should I wish to expand later? What kinds of risks will I be exposed to later? How can I limit my liability? What kinds of taxes will I be expected to pay?

Sole Proprietorship More than 75% of all businesses in the United States are sole proprietorships. The essence of this kind of business is that they are owned by just one person and usually, that person is directly involved in the day-to-day running of that business. As a sole proprietor, you have total responsibility for that business and all the profits from that business will be yours too, as will all the debts and liabilities.

The advantages of a sole proprietorship are that you are the only boss, it is very simple to get started, you keep all the profits, revenue from the business is taxed as your personal income and you can stop whenever you like. The disadvantages are that you assume unlimited liability, your ability to raise investment capital is limited, you have to be able to do everything yourself from book-keeping to advertising, keeping high-quality employees can be hard and the life of the business is limited to your own life time.

Partnership A partnership is when two or more people share in the ownership of the business. The partners are responsible for every decision collectively, although decision-making might be dived up unevenly by agreement of all partners equally. All agreements should be written down, preferably in the presence of a solicitor.

The benefits of a partnership are that you get the benefit of other opinions, it is easy to get started, more investment capital is accessible, partners pay only personal income tax, high-quality employees can be made partners to encourage them to stay. The disadvantages are that partners have unlimited responsibility, profits must be shared,partners, may disagree and the lifetime of the partnership is limited by death.

Corporation A corporation differs from the other types of company, because a corporation is considered as a ‘person’ by the law. It has a wholly separate existence from its owners. As such it can sue and be sued..

The benefits of a corporation are that stockholders have limited liability, corporations can raise the most investment capital, they have an unlimited lifespan, ownership is easily transferable and they employ experts. The disadvantages are that they are taxed twice, starting up is expensive and they are more strictly regulated.

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