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Why your new company’s business formation structure matters

On Behalf of | Jan 25, 2023 | Business Law

When a single individual chooses to take on a position as an independent contractor but doesn’t formally register their business activity with the state, they create a “sole proprietorship” by default. They simply have to report their business earnings and losses on their individual tax return but, in most states, they don’t need to do anything else to lawfully engage in business in this way.

However, all other business types generally require a structural formation process before they can launch and lawfully operate in any given state. The main business formation types available to new business owners in Texas, for example, are:

  • Family limited partnerships
  • Limited partnerships
  • Limited liability companies (LLCs)
  • S-corporations
  • Corporations

You’ll want to thoughtfully research the potential pros and cons of each option before committing to any of them. 

Researching your options

Most of the time, choosing a limited liability company structure is a good approach for new business owners. This option allows either a single member (owner) or multiple members to benefit from personal liability protection while avoiding the rigid management structure and rigorous reporting requirements that are mandatory for corporations.

With that said, each of the primary business structures afforded to entrepreneurs and practicing professionals works well for different kinds of business models. For example, if you plan to operate on a local basis, you don’t plan to hire many employees and your business model is low-risk, it is possible that a partnership would work well. If you plan to run a multi-state operation, a corporation may be a better choice. 

By carefully considering how each formation opportunity would affect your entrepreneurial vision, you’ll be able to make a truly informed decision when committing to a specific option. The legal formation of a company structure is a consequential undertaking. Being thoughtful now will help better ensure your venture thrives once it has been successfully launched. 

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