STARTUPS BASICS 101

😊Hey Folks, 

Here's guide to third topic_ Legal structure

Choosing the right legal structure for your startup is crucial, as it affects your liability, taxes, and operational flexibility. Here are some common legal structures:

1. Sole Proprietorship:

   • Simple to set up and manage.
   • The owner has complete control and receives all profits but is personally liable for all debts and obligations.

2. Partnership:

   • Two or more individuals share ownership and profits.
   • General partners have personal liability, while limited partners have liability only up to their investment.
   • Requires a partnership agreement.

3. Limited Liability Company (LLC):

   • Offers limited liability protection for owners (members).
   • Profits and losses can pass through to members' personal tax returns, avoiding double taxation.
   • More flexible management structure compared to corporations.

4. Corporation:

   • A separate legal entity that protects owners (shareholders) from personal liability.
   • Can raise capital by issuing stock.
   • Subject to double taxation (corporate profits and dividends taxed) unless structured as an S-Corporation.

5. S-Corporation:

   • A special type of corporation that avoids double taxation.
   • Limited to 100 shareholders and all must be U.S. citizens or residents.
   • Allows profits and losses to pass through to shareholders’ personal tax returns.

6. Nonprofit Organization:

   • Designed for charitable, educational, or social purposes.
   • Must apply for tax-exempt status and reinvest all profits back into the organization.

Considerations for Choosing a Structure:

• Liability: Consider the level of personal liability you are willing to accept.
• Taxation: Evaluate how each structure will affect your tax situation.
• Funding: Some structures are better for attracting investors.
• Regulations: Understand the regulatory requirements for each structure in your jurisdiction.
• Future Plans: Think about your long-term goals for growth and exit strategies.

Consulting with a legal or financial advisor can help you make the best choice for your specific situation.