In the wake of the post-pandemic startup surge, 2023 set a record in the business law industry. According to the U.S. Chamber of Commerce, the year concluded with a total of 5.5 million new business applications filed nationwide, an all-time record. However, business formation is more than just choosing a name, providing goods or services and making money… legally speaking.
What is Business Formation?
It is important to note that creating a business and business formation are related, but not the same! Creating a business is a broader concept that includes everything from the business idea to launch, while business formation is a legal process.
More specifically, business formation is the process of establishing a new legal entity and requires you to: select a business structure or type, register your business with the appropriate government authorities and fulfill any legal requirements necessary to operate your business in compliance with the law.
This means that forming a business is more than just paperwork—it determines tax obligations, liability exposure and operational flexibility. The first step is determining the legal structure of your business.
Deciding on a Legal Structure
Deciding on a legal structure is one of the most important decisions you will make, as your choice of business structure affects: your ability to raise money, how you pay taxes, the paperwork you need to file, your corporate governance framework and your personal liability.
Sound daunting? Trust us, we understand. But do not panic. Take a breath and consider these common legal structures as a good place to start.
Sole Proprietorship
A sole proprietorship is the most basic form of business structure, where you are the sole owner and operator of the business. Some states might require that you have a business license or a local permit; but depending on your business concept, there might not be any additional filing requirements.
This is the simplest type of business structure, but there is no legal separation between you and your business. This could put you at risk of being personally responsible for any financial and legal liabilities of the business. Additionally, profits and losses are reported on your individual tax return. This is the easiest type of business to operate, but comes with the highest risk of personal liability.
Partnership
A partnership functions like a sole proprietorship, but with two or more individuals sharing ownership, responsibility and profits of a business. This means that like a sole proprietor, each partner is personally responsible for the debts and liabilities of the business, and the profits and losses are reported on each partner’s individual tax return.
Limited Liability Company (LLC)
An LLC is a legal entity that is distinct from its owners. An LLC combines the personal liability protection of a corporation with operational flexibility. The personal assets of the owners of the LLC (known as members) are protected from business debts and liabilities, so long as they follow the corporate formalities required under law. The LLC members can choose to be taxed as a pass-through entity or as a corporation. LLC members can make management decisions together, or nominate managing members to govern the operation of the business.
Corporation
A corporation is also a legal entity that is distinct from its owners (known as shareholders) and offers the highest level of protection from personal liability. Corporations are the most complex business structure as they are subject to more legal and regulatory requirements. A corporation is required to file taxes separately from the shareholders and can elect to be taxed as a C corporation or S corporation.
Less Common Business Structures
In addition to the more common business structures, there are other legally recognized options—such as Nonprofit Corporations, Benefit Corporations, and Limited Liability Partnerships. With so many choices available, you’re sure to find a business structure that best fits your unique goals and needs.
Form Right, Grow Smart
There are many considerations when it comes to forming a business: permits and licenses, intellectual property, contracts and agreements, tax obligations, the list goes on. Forming a legally sound business lays the foundation for a successful and sustainable venture. An experienced attorney—like our attorneys at Giro & Associates, LLC—can help you navigate the process with confidence, ensure compliance at every step, and set up your business for long-term success.
To begin your business formation process and take the first step toward a successful future, call our River Edge, New Jersey Law Office at 201-502-7834, or send us a message with a brief description of your situation, and we will get back to you right away.