| Before a business plan is presented to funders, they | | | | partners keep control. |
| would like to see that at least some low cost steps | | | | Liability |
| have been taken by the founders. One of these is to | | | | It is important for a founder to discuss legal structures |
| choose a legal structure for the business and to | | | | with a lawyer to understand their legal liability in various |
| incorporate it, a process which generally costs only | | | | structures. Generally, as control is spread out from the |
| hundreds of dollars. | | | | owner, liability is also lowered. For example, a sole |
| There are three major issues to consider when | | | | proprietorship has unlimited personal liability for the |
| choosing a legal structure: control, liability, and taxes. | | | | owner, as are partners in a partnership and general |
| Different legal structures have pros and cons on these | | | | partners in a limited partnership. Limited partners are |
| three issues and you must seek what you are | | | | only liable to the extent of their investment and |
| comfortable with and what will work best for the | | | | corporations and S corporations limit the liability of |
| business both now and throughout its projected | | | | stockholders as well. |
| growth. The major legal structures to consider are sole | | | | Taxes |
| proprietorships, partnerships, limited partnerships, | | | | A tax accountant should be consulted to determine |
| corporations, and S corporations. | | | | the best legal structure for tax purposes. Although you |
| Control | | | | may have no profits to be taxed in the early years of |
| A sole proprietorship retains the greatest amount of | | | | the company, you will eventually be concerned with |
| control for the founder (100% of ownership control to | | | | limiting your tax liability. Corporations are the one legal |
| be exact). Structures that allow for investors to take | | | | structure that causes double taxation on profits. This |
| part mean an increasing loss of control from the | | | | means that corporate profits are first taxed at the |
| founder. These include partnerships, corporations and | | | | corporate tax rate and then dividends to stockholders |
| S corporations. A limited partnership may be a good | | | | are taxed at the going dividend tax rate. In other |
| option for a founder who wants to retain control while | | | | structures, profits flow directly to the shareholders or |
| bringing in outside investment. Limited partners (also | | | | owners and are taxed at the individual tax rates. This |
| called silent or sleeping partners) of the business have | | | | is the advantage of S corporations, as they limit liability |
| no say in how the business operates, while the general | | | | like a corporation but do not incur double taxation. |