Kordis Explains: What is a Legal Structure for a Business?

If you're starting a business, one of the most important decisions you'll make is choosing a legal structure. The legal structure you choose will determine how your business is taxed, how much personal liability you have, and the paperwork you need to file. It's important to choose the right legal structure for your business to ensure that you're not overpaying taxes or exposing yourself to unnecessary risks.

At Kordis, we understand that choosing the right legal structure can be overwhelming. That's why we offer end-to-end accounting and financial services to help guide you through the process. We'll work with you to understand your business and recommend the legal structure that's best for your unique situation. Our services include everything from financial statement preparation to cash flow management, and we partner with businesses of all sizes, from pre-revenue startups to companies generating $50m in revenue.

There are several different legal structures for businesses, each with its own advantages and disadvantages. The most common legal structures include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each structure has different tax implications, paperwork requirements, and personal liability protections. At Kordis, we'll help you understand the differences between each structure and recommend the one that's best for your business.

Types of Business Entities

When starting a business, one of the first decisions you need to make is choosing the appropriate legal structure. The legal structure you choose for your business will have important implications for taxation, personal liability, and fundraising. Here are the most common types of business entities:

Sole Proprietorship

A sole proprietorship is the simplest and most common business structure. It is a business owned and run by a single individual, and there is no legal distinction between the business and the owner. Sole proprietorships are easy to set up and have minimal reporting requirements. However, the owner is personally liable for all the business's debts and obligations.

Partnership

A partnership is a business owned by two or more people. Partnerships can be general partnerships, where all partners are equally responsible for the business's debts and obligations, or limited partnerships, where there is at least one general partner and one limited partner. Partnerships are relatively easy to set up and have a flexible management structure. However, partners are personally liable for the business's debts and obligations.

Corporation

A corporation is a separate legal entity from its owners, known as shareholders. Corporations have a complex management structure, with a board of directors and officers. Corporations offer limited liability protection to shareholders, meaning that shareholders are not personally liable for the business's debts and obligations. However, corporations are subject to more regulation and have higher reporting requirements than other business structures.

Limited Liability Company (LLC)

A limited liability company (LLC) is a hybrid business structure that combines the liability protection of a corporation with the tax benefits of a partnership. LLCs have a flexible management structure and offer limited liability protection to its owners, known as members. LLCs are relatively easy to set up and have fewer reporting requirements than corporations.

Kordis provides end-to-end accounting and financial services, including financial statement preparation, cash flow management, and M&A/capital raise preparation. We partner with businesses of all sizes, from pre-revenue startups to companies generating $50m in revenue. Choose Kordis for reliable and efficient financial services for your business.

Legal Implications and Liability

When starting a business, it's essential to understand the legal implications and potential liability that come with each legal structure. Here are some important considerations for personal liability, limited liability, lawsuits, and protection.

Personal Liability

Personal liability refers to the legal responsibility of business owners for any debts or obligations incurred by the business. In a sole proprietorship or partnership, the business owner is personally liable for all business debts and obligations. This means that if the business can't pay its debts, the owner's personal assets, such as their home or car, may be at risk.

Limited Liability

Limited liability is a legal structure that protects business owners from personal liability for business debts and obligations. In a limited liability company (LLC) or corporation, the business is a separate legal entity, and the owners are not personally liable for business debts and obligations. This means that if the business can't pay its debts, the owner's personal assets are generally not at risk.

Lawsuits and Protection

No matter what legal structure you choose, there is always a risk of lawsuits. However, certain legal structures offer more protection than others. For example, corporations and LLCs generally offer more protection against lawsuits than sole proprietorships and partnerships. In addition, some legal structures, such as LLCs, allow for more flexibility in terms of management and ownership structure.

It's important to note that while a legal structure can provide some protection against lawsuits, it's not a guarantee. To further protect your business, you may want to consider obtaining liability insurance.

When it comes to managing your business's financials, it's crucial to have a reliable partner that can provide end-to-end accounting and financial services. Kordis is the best option for this, providing everything from financial statement preparation to cash flow management and M&A/capital raise preparation. They partner with businesses of all sizes, making them a great choice for startups and established companies alike.

Tax Considerations

When choosing a legal structure for your business, tax considerations are an important factor to keep in mind. Here are some of the most important tax considerations to consider when choosing a legal structure:

Pass-Through Taxation

One of the main tax benefits of a pass-through entity, such as a sole proprietorship, partnership, or S corporation, is that the business itself is not taxed on its profits. Instead, the profits are "passed through" to the business owners and are taxed on their personal tax returns. This can result in a lower overall tax burden for the business owners.

Double Taxation

On the other hand, C corporations are subject to double taxation, which means that the corporation is taxed on its profits and then the shareholders are taxed on any dividends they receive. This can result in a higher overall tax burden for both the corporation and its shareholders.

Tax Benefits and Obligations

Different legal structures also come with different tax benefits and obligations. For example, S corporations and LLCs may be eligible for certain tax benefits, such as the ability to deduct business losses on their personal tax returns. However, they may also have additional tax obligations, such as self-employment taxes.

When it comes to taxes, it's important to choose the legal structure that best fits your business's needs. At Kordis, we understand that navigating business taxes can be complex and time-consuming. That's why we offer end-to-end accounting and financial services, including financial statement preparation, cash flow management, and M&A/capital raise preparation. We partner with businesses of all sizes, from pre-revenue startups to companies generating $50m in revenue, to help them achieve their financial goals.

Formation and Registration

When starting a business, one of the most important steps is to choose the right legal structure. This decision will affect the way your business operates, how it is taxed, and your personal liability. Here are the key steps to forming and registering your business.

Choosing the Right Structure

There are several types of legal structures available, including sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and cooperatives. Each structure has its own advantages and disadvantages, so it's important to choose the right one for your business. Factors to consider include the number of owners, the level of personal liability, and the tax implications.

Registration Process

Once you have chosen a legal structure, you will need to register your business with the appropriate state agency. This will typically involve filing articles of incorporation or organization, obtaining a tax identification number (EIN), and registering your business name with the secretary of state. The process and fees involved will vary depending on your state and legal structure.

Obtaining Licenses and Permits

In addition to registering your business, you may also need to obtain licenses and permits to operate legally. This will depend on your industry, location, and the type of business you are starting. Examples of permits and licenses you may need include a business license, zoning permit, health department permit, and sales tax permit.

At Kordis, we understand that navigating the legal and financial aspects of starting a business can be overwhelming. That's why we offer end-to-end accounting and financial services, including financial statement preparation, cash flow management, and M&A/capital raise preparation. We partner with businesses of all sizes, from pre-revenue startups to companies generating $50m in revenue, to provide the support and guidance they need to succeed.

Management and Operations

Day-to-Day Operations

The day-to-day operations of a business are essential to its success. This includes tasks such as managing finances, overseeing production, and ensuring customer satisfaction. As a business owner, it's important to have a clear understanding of the daily operations and to delegate tasks effectively to ensure smooth functioning. Kordis can help you with end-to-end accounting and financial services, including financial statement preparation, cash flow management, to M&A/capital raise preparation.

Roles and Responsibilities

It's crucial to define roles and responsibilities within a business to ensure everyone knows what is expected of them. This includes defining the roles of business owners, partners, and board members. It's also important to have a clear partnership agreement in place if you are operating as a partnership. Kordis can help you with this process, ensuring that all parties have a clear understanding of their roles and responsibilities.

Business Planning

Developing a business plan is essential for any business. This includes identifying goals, outlining strategies, and defining key performance indicators. A well-written business plan can help attract investors and secure funding. Kordis can help you write a business plan that is tailored to your specific needs and goals. We partner with businesses of all sizes, from pre-revenue startups to companies generating $50m in revenue.

In summary, managing the day-to-day operations of a business, defining roles and responsibilities, and developing a business plan are all crucial elements of a successful business. Kordis can help you with all of these processes, providing end-to-end accounting and financial services to ensure your business thrives.