How To Choose the Right Legal Entity for Startups

According to the U.S. Chamber of Commerce, American entrepreneurs filed about 5.5 million new business applications in 2023, setting a new record and highlighting just how popular entrepreneurship has become in the U.S.

In Georgia, 277,626 new business applications were filed in 2023, ranking the state number 4 in 2023 business applications per capita.

Are you thinking about joining these entrepreneurs and launching a startup company soon? If so, you’ll need to take several steps to set up your Atlanta startup for success.

Learn About the Different Legal Entities

When an entrepreneur decides to create a startup, determining their legal entity  might not be on their radar. They have so many other things to worry about that they won’t always spend as much time educating themselves about the legal process as they should.

Don’t make this mistake. The second you decide a startup is your path, begin researching the different legal entities. Make sure you know what each one entails.

Here is a brief overview of the legal entities you can consider:

• Sole Proprietorship: A startup owned by a single entrepreneur without a distinction between the business and its owner from a legal and financial perspective
• Partnership: A startup owned by two or more entrepreneurs without any distinction between the business and its owners
• Limited Liability Company (LLC): A startup owned by one or more entrepreneurs that separates owners from their company to minimize legal and financial liabilities
• C Corporation: A startup that is a corporate tax entity and separates its owners from the company
• S Corporation: A startup that can legally pass on corporate income, losses, deductions, and credits to its stakeholders

Give Thought to Your Startup’s Business Goals

Before officially launching an Atlanta startup, generate a list of goals. Answer the question, “Where would you like your startup to be in five years?”

Doing this will give you goals to pursue as you aim to start a successful startup. It will also help you choose the right legal entity for your company.

If you see your small business staying small and catering to a tiny group of people, a C corporation might not make sense. You may be better off going with an LLC.

This will be a different story if you already envision your company becoming a Fortune 500 business. You might want to set up your startup as an LLC at the very least, and possibly a C corporation or even an S corporation.

Determine Your Risk Tolerance

Starting a business will always come with risk. For entrepreneurs legal entities are a way to minimize the risks they may face.

Sole proprietorships or partnerships, for example, don’t offer anything in terms of risk protection. If your startup declares bankruptcy or faces legal action, these actions can impact your finances. These legal entities don’t create enough separation between your company and your assets.

On the other hand, LLCs, C corporations, and S corporations are better options for entrepreneurs looking to mitigate financial and legal risks. They might be your preferred options if you aren’t a risk-tolerant person. They’ll provide the separation you need to run your company without constantly worrying about how it could impact your personal assets.

Consider the Tax Implications for Legal Entities

Your tax obligations will change from one legal entity to the next.

If you’re a sole proprietor, your business will be taxed at the individual tax rate. If you’re the owner of an LLC, you’ll benefit from what is called pass-through taxation. LLCs aren’t subjected to federal income taxes and instead “pass through” tax obligations to the individuals who own them.

Corporations, meanwhile, are ideal for bigger businesses that can afford to play by the Internal Revenue Service’s corporate tax rules.

Think About Your Future Fundraising Plans

If you believe your startup is destined to grow rapidly, there might come a time when you’ll need to begin bringing on new investors to keep up. In these cases, starting a corporation or an LLC versus starting a sole proprietorship will usually be the right choice.

Starting a corporation will enable you to remain open to the idea of seeking investor funding. You’ll just need to be sure you’re ready to answer these investors and keep investor preferences in mind when making important business decisions. You may also need to familiarize yourself with issues like equity allocation.

Speak With a Lawyer About Starting an Atlanta Startup

Still confused about which legal entity you should choose for your Atlanta startup? Don’t hesitate to touch base with a lawyer who understands the ins and outs of helping startups select the right legal entities based on their specific needs.

An experienced attorney can help you weigh all your options and narrow them down. They can do this by discussing your business plans and pointing out how you would benefit from different legal structures depending on your long-term vision and goals.

Contact Us To Find Out More About Startups, Legal Entities, and Choosing the Right One

As more entrepreneurs take the exciting leap of embarking on their own startup journeys, legal entities are becoming more important than ever before. If you fail to choose the right one, it could put your startup in a precarious position from the start. Therefore, it’s in your vested interest to enlist the help of a seasoned professional.

MacGregor Lyon, LLC, can assist you in selecting the appropriate legal entity for your Atlanta startup. Contact us at (404) 897-0538 today to talk to a trusted lawyer about your business and the legal structure that would be right for it.