Choosing a Legal Structure for Your Startup
While sole proprietorships and general partnerships are the easiest legal structures to set up, they don’t provide any personal asset protection like C-Corps, S-Corps, LLCs, and Limited Partnerships. The idea of starting a business that can put 100% of your personal assets at risk is not a smart one.
There are volumes of books about choosing the right entity, but from my experience, LLC’s and S-Corps are the most multi-purpose for the startup. S-Corps have the advantage of easily morphing into C-Corps if you’re thinking about eventually going that route. They require more paperwork and formalities (read: costs) than and LLC, but can also be set up to use flow-through taxation.
The LLC is the newest entity form, so in the grand scheme of corporate law, there’s not much precedence there. You can benefit from flow-through taxation, while maintaining the corporate veil for liability. The LLC requires pretty minimal paperwork, and is easy to set up. See my post on setting up the Oregon LLC.
Some particular states have exceptional protection for their LLC’s and Corporations, like Wyoming and Nevada. If your main concern is asset protection - splitting up your investments (businesses, real estate, etc.) into their own companies to make yourself seem like a poor lawsuit target - these two states, especially Wyoming, will keep your name under lock and key.
Hopefully this has given you a few ideas to help you get started. Of course, to determine the best legal structure for optimal taxation and protection of your assets, talk to a corporate attorney who can show you the best structure for your specific situation. If you want to get a basic understanding of the legal structures, the best resource I’ve found is Own Your Own Corporation by Garrett Sutton, Esq. This book covers legal structures from the perspective of tax sheltering, ownership and financing flexibility, and personal asset protection – the main reasons to use a separate legal structure.
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Tony Kau is co-founder of Portland web design and Internet marketing company Vanivo. For service inquiries, you can contact him directly at tony -at- vanivo.com.
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