Business Structure and Registration: Choosing the Right Legal Structure and Fulfilling Registration Requirements

By Alan Miklofsky, updated 10/11/24

When starting a business, one of the first and most important decisions you will make is choosing the legal structure of your company. The structure you choose will impact everything from liability protection and taxes to regulatory requirements and your ability to raise capital. Additionally, fulfilling the necessary registration requirements for your chosen structure is critical to operating legally. Here's a breakdown of the most common business structures and what to consider when selecting the right one for your needs.

Sole Proprietorship

A sole proprietorship is the simplest and most common structure for small businesses. It’s owned and operated by one individual, and there’s no legal distinction between the owner and the business.

Pros:

• Easy to set up and low cost.

• The owner retains full control.

• Simplified tax filings (income is reported on your personal tax return).

Cons:

• Unlimited personal liability for business debts and obligations.

• Raising capital can be more challenging.

• Less formal structure, which may limit growth.

Registration Requirements: In most cases, you will need to register your business name with your local government (often as a DBA—"doing business as"). You may also need to obtain specific licenses or permits depending on your industry.

Limited Liability Company (LLC)

A limited liability company (LLC) is a flexible and popular structure for businesses of all sizes. It offers the liability protection of a corporation with the tax benefits of a sole proprietorship or partnership.

Pros:

• Limited personal liability for business debts.

• Pass-through taxation (profits and losses pass through to your personal tax return, avoiding double taxation).

• Flexibility in management and operations.

• Relatively easy to set up compared to corporations.

Cons:

• More complex and costly to form than a sole proprietorship.

• Self-employment taxes may apply.

• Regulations can vary by state.

Registration Requirements: To form an LLC, you must file articles of organization with your state and pay the associated fees. You will also need an operating agreement outlining the company’s ownership and management structure. Don’t forget to apply for an EIN (Employer Identification Number) with the IRS, and ensure any required business licenses are in place.

Partnership

A partnership involves two or more people who agree to share profits, losses, and control of the business. Partnerships can be either general partnerships (GPs) or limited partnerships (LPs).

Pros:

• Easy to establish.

• Shared decision-making and resources.

• Pass-through taxation.

Cons:

• Partners have joint liability (in GPs), meaning each partner can be held responsible for the actions of the other.

• Potential for disagreements between partners.

• Shared profits.

Registration Requirements: Partnerships typically require a formal partnership agreement that outlines roles, responsibilities, and how profits will be distributed. You may also need to register your business name and acquire appropriate licenses, depending on your industry and location.

Corporation

A corporation is a more complex legal entity that is separate from its owners (shareholders). It offers the highest level of protection from personal liability but involves more regulatory requirements.

Pros:

• Limited liability for owners.

• Easier access to capital through the sale of stock.

• Perpetual existence (the company can continue even if ownership changes).

• Certain tax advantages for larger businesses.

Cons:

• More expensive and complicated to form.

• Heavier regulatory and compliance requirements.

• Double taxation (profits are taxed at the corporate level, and shareholders are taxed on dividends).

Registration Requirements: To form a corporation, you must file articles of incorporation with your state, adopt corporate bylaws, and issue stock to initial shareholders. Regular meetings and detailed records must be kept. Corporations also need an EIN and may require special permits or licenses, depending on the business activity.

Choosing the Right Structure

When choosing your business structure, consider the following factors:

• Liability: How much personal liability are you willing to assume?

• Taxes: What is the most advantageous tax structure for your business?

• Capital: How much capital do you need, and how will you raise it?

• Growth: Do you plan to expand, and if so, how will your structure support that growth?

• Regulation: How much regulatory oversight are you comfortable with?

Each structure has its benefits and drawbacks, and the right choice depends on your business goals, size, and future plans. For many small business owners, an LLC strikes the best balance between liability protection and tax simplicity. However, a sole proprietorship or partnership may be ideal for those just starting out with minimal risk, while corporations may suit those looking for significant investment opportunities and more complex growth strategies.

Registering Your Business

Once you’ve selected a legal structure, you’ll need to meet the registration requirements in your state and locality. Here's a general checklist:

1. Register the Business Name: Most businesses will need to file a "doing business as" (DBA) or trade name registration with their state or county.

2. Apply for an EIN: Most businesses, especially those with employees, need to apply for an Employer Identification Number (EIN) from the IRS.

3. File Formation Documents: LLCs, corporations, and partnerships typically need to file articles of organization or incorporation with their state.

4. Obtain Permits and Licenses: Depending on your industry, you may need local, state, or federal licenses or permits to operate legally.

5. Register for Taxes: If you're selling goods or services, register with your state's tax agency for sales tax collection.

6. Comply with Local Zoning: Ensure your business location complies with local zoning ordinances, especially if you’re operating from home or opening a physical storefront.

By carefully considering your business structure and completing the necessary registration steps, you can set a strong foundation for future growth and success.

Alan Miklofsky is a business consultant with decades of experience helping shoe retailers and entrepreneurs navigate the complexities of starting and growing their businesses.