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Which type of legal structure is best for a new business?

One of the great joys for Michigan business owners is the ability to follow and realize a person's dream. It can take years of hard work before an individual realizes his or her dream of owning a new business.

Even once a person is ready to own a small business, there are a lot of important choices that need to be made to set the business in motion. One key choice is how to legally structure the business. There are many different options available, with each option having its own advantages and disadvantages.

For example, when there is a single business owner, he or she may choose to structure the business as a sole proprietorship, as the majority of small business owners around the country do. Sole proprietorships are easy to set up and maintain because it does not require a great deal of paperwork like other structures. On the other hand, because there is no legal separation between the business owner and the business, the downside is that business owners can be held responsible for debts of the business.

Individuals might also choose to establish a partnership, which is also fairly easy to set up. Under a limited partnership, the liability of limited partners is limited to their contribution to the partnership. Likewise, a corporation may be a popular choice to limit the liability of those involved in the company.

Another popular option is a limited liability company, which combines aspects of a partnership and corporation. Specifically, there are tax advantages like a partnership, combined with the limited liability shareholders have in a corporation.

There are also other kinds of companies, including different options within the above structures, as well as other options unique to Michigan. Michigan is one of a few states that has a low-profit limited liability company, which is a hybrid of a non-profit and for profit organization. This type of structure is a for-profit company, but it has a charitable mission first, with profits being a secondary concern.

Ultimately, while the basic advantages and disadvantages of different company structures may be easily ascertainable, the decision of which structure to adopt can be very complex. The liability of business owners is just one of many business planning considerations. Accordingly, those who are setting out to realize their dream of business ownership should ensure they understand each structure and what option is best for their personal circumstances.

Source: Michigan Small Business Development Center, "Guide to Starting and Operating a Small Business," accessed on Nov. 7, 2015

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