Starting a Business: Why Your Legal Structure Matters

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Whether you’re launching a tech startup or opening a neighborhood cafe, starting a business is exciting. It can also be confusing and risky if you don’t know exactly what you’re doing. You must think about matters like business plans, regulatory compliance, intellectual property protection, and corporate documentation.

Atlanta startup meeting together

Before you do all that, however, you have to decide what kind of business structure you need. Choosing the right one has far-reaching implications, including tax obligations and legal liabilities. A qualified Atlanta business law firm can help you select the correct business entity for your situation.

Primary Types of Business Structures

What are your options for selecting a business structure? The main business entity types are as follows:

Sole Proprietorship

A very popular business structure, the sole proprietorship is the simplest to arrange and the least regulated. Sole proprietorships provide no legal distinction between the owner and their business. 

Although the individual owner has total business control, their personal assets are at risk if the business encounters legal or financial trouble.

Partnership

A partnership consists of two or more business owners. In a general partnership, the partners share ownership, management, and profits and losses. Like sole proprietors, general partners have personal liability for business debts and lawsuits. 

In a limited partnership, general partners are joined by limited partners who invest capital but don’t have management responsibilities or legal liability beyond their investment amount. 

Corporation

The most complicated business structure type is the corporation. 

Corporations offer stronger liability protection than other business entities but often have stricter regulatory requirements. 

Examples include holding regular shareholder meetings, conducting detailed record keeping, and adopting corporate bylaws. 

There are several types of corporations with different tax implications, management structures, methods of income generation, and the number and type of shareholders allowed. For example:

  • C corporations (C-corp)
  • S corporations (S-corp)
  • B corporations
  • Professional corporations 
  • Nonprofit corporations 
  • Close corporations

Limited Liability Company (LLC)

LLCs function as a hybrid between partnerships and corporations. They have the flexibility and simplicity of general partnership structures but offer more liability protection for owners, as corporations do. 

LLCs can distribute profits and losses as they wish and may elect to pay taxes as corporations or partnerships.

Three Reasons Your Business Structure Matters

Structure matters because it has long-lasting and wide-ranging implications for how you run your business and what the government expects from you. 

Atlanta business man

Specifically, the structure you choose does the following:

  1. Affects Your Liability

Sole proprietorships don’t protect owners from personal responsibility for business debts and lawsuits. That means if your business harms someone or incurs financial liabilities, your assets could be at risk. 

In contrast, LLCs and corporations offer limited personal liability. In partnerships, general partners are responsible for business liabilities, but limited partners can only lose the amount they invested.

  1. Determines Taxation 

Sole proprietorships, LLCs, and partnerships offer pass-through taxation benefits. That means the owners pay tax on their earnings (or share of profits), but the business doesn’t pay corporate income taxes. 

Because corporations are separate entities from their owners, they are typically subject to double taxation. That means for-profit corporations pay taxes on income, while shareholders pay taxes on their dividends. 

However, these general rules contain some finer details. For example, LLCs can choose whether to pay taxes as partnerships or corporations. S corporations (S-corps) are taxed more like partnerships, helping them avoid the double taxation of C corporations. Nonprofit corporations are tax exempt.

  1. Dictates Regulatory Requirements

Corporations demand the highest level of regulatory compliance. They must have a board of directors, issue stock to shareholders, document all stock transfers, hold annual director and shareholder meetings, maintain meeting minutes, and adopt and maintain bylaws.

LLCs have less strict regulatory requirements but are advised to hold annual meetings, maintain updated operating agreements, and record all membership interest transfers. Other business structures have even fewer (if any) internal compliance requirements.

Choosing the Right Business Structure

Questions like the following may help you select the right business structure for your needs:

  • Are you a single owner starting a small business? An LLC provides certain liability protections without the management and regulatory complications of corporations.
  • Do you plan to grow and sell your business? If so, a C corporation may be ideal because it enhances credibility and provides easier access to capital.
  • What is your risk tolerance? If you have a low risk tolerance or substantial assets you wish to protect, you should consider an LLC or corporation over a sole proprietorship or a partnership.
Atlanta business partners talking

The safest way to choose the right business structure is to consult an Atlanta business attorney. Experienced legal counsel can also help you take the other steps involved in starting a business in Georgia. 

For example, forming an LLC in the state requires the following:

  • Business name registration: You have to choose a unique business name that complies with state regulations.
  • Certificate of Organization: You must file Articles of Organization with the Georgia Secretary of State online or by mail.
  • Operating agreement: You must draft a document outlining how you will manage your business, distribute profits, and allocate losses.
  • Ongoing compliance: You also must file annual registrations and tax returns for your business. If you fail to maintain compliance, you may expose your personal assets to business liabilities.

Consult an Atlanta Small Business Attorney Today

If you’re starting a business in Georgia, MacGregor Lyon, LLC, can help. We offer comprehensive legal solutions tailored to the needs of your small business or startup. As Atlanta small business owners ourselves, we understand the challenges you face and can help you avoid common pitfalls.

From selecting the right structure to securing a commercial lease, our knowledgeable team will guide you through the complexities of business law. Call us today at (404) 897-0538 or contact us online to schedule a free consultation.

Attorney Glenn Lyon

On Behalf of MacGregor Lyon

Principal Partner

Glenn M. Lyon is a distinguished business attorney recognized for his exemplary service to small and medium-sized, privately-held businesses, and start-up companies.

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