Business Formation—Understanding Legal Structures (Part 3)

By Hampton & Pigott
Posted on 6-4-2021

In the preceding articles, we covered some of the most common business entities. Now let's take a look at one more option for those businesses that don't "fit the mold", and consider how you can go about deciding which setup is best for you.

Looking at Hybrids

While most companies fall into one of the formats discussed in the previous articles, some do not quite fit in those spaces. There are a handful of less common legal entities that can be formed for these circumstances, with many of them taking on elements of other types of legal forms.

If your business is designed with social or charitable purposes in mind, you may want to consider a Public Benefit Corporation. These so-called 'B' Corps tend to focus heavily on these sorts of issues and tend to have a greater focus on all involved rather than simply focusing on those who own stock.

What about a largely charitable business, but that still might turn a profit? There are Low-Profit LLCs (or L3Cs) that are made for just such circumstances. This form allows a business to turn a profit but mostly focuses on how the business runs as a charitable entity.

Choosing the Right Format

One of the most important steps you can take as a business owner is to figure out what type of entity that your business will become. As you might imagine, this is absolutely the kind of thing that requires the intervention of an attorney. Not only will an attorney explain to you exactly how each type of entity works, but he or she will help you to determine how to best reduce your liability while still giving you the freedom to run the business as you wish.

Most lawyers will, however, try to advise you to find a form that's going to limit your risks. While the vast majority of businesses out there might be sole proprietorships or general partnerships, the truth is that most attorneys really do prefer LLCs for small businesses. Simply having something in place to shield you from common types of liability can go a long way towards making your business more stable.

If you're looking for major growth, though, C Corporations are still the gold standard. While there are certainly reasons to go with the other types of entities that are related to taxation and even personal control, the truth is that C Corporations have the right combination of an easy ability to scale up and a reduced amount of personal liability. Being able to issue different types of stock and grow without many restrictions makes this an attractive choice for anyone looking to make a major mark on the business world.

It is the course of wisdom to talk to an attorney about the format that your business should take. You need a good balance between being able to run the business as you've envisioned, being able to grow in time, and being able to be shielded from liability. Always consult an experienced attorney so that you can make the choice that's right for your future.