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What does your business want to be when it grows up?
Once you've written a solid business plan that answers this question, you're ready to begin thinking about a legal structure for your new venture. "You need to know where your business is headed," says CPA Craig Malmgren, a tax manager at the firm of Lautze and Lautze in Oakland.
For instance: Do you plan to work alone? Do you plan to add employees over the next few years? Do you hope, some day, to be a corporation? And what will that corporation look like? Will it be small? Or large? Or somewhere in between?
But there's more. You'll also need to factor in tax, legal and compliance considerations. And to thoroughly examine these considerations, you'll need to seek professional help.
"Choosing a legal structure can be a complicated decision," says Malmgren. "And with the introduction of limited liability companies and limited liability partnerships, as well as major revisions in the S Corporation operating rules, the decision has become even more complex."
When attempting to sort through the various legal entities that your business can form under, the first step is to consult with your CPA, who can help you discuss options and plans for the future of your business. Depending on the complexity of the legal structures you're considering, your CPA will then refer you to an attorney. And if you're considering anything other than a sole proprietorship, Malmgren suggests that you spend the legal fees now in order to save time and money later. "An attorney can help you decide what the best entity would be for your scenario," he says. "And then they can help you with the legalities of setting it up."
A good attorney will weigh all the necessary factors to help you choose the best structure for your business. The type of business you're starting and the liabilities you'll assume, the distribution of the business' earnings, and your capital needs will all be important factors in choosing a structure. In addition, an attorney will weigh the legal restrictions and the tax advantages and disadvantages for your particular situation.
Most likely, your business' structure will fall into one of the following categories:
Instead, they should make educated, informed decisions that will help them to invest in their business' future. And with the guidance of a good team of tax and legal experts, you'll be certain to make the right decision about your business' legal structure -- a decision that'll save you money and headaches in the years to come.