Types of Legal Entities and Why You Need Help From an Attorney

Are you contemplating starting a business? It’s an exciting time, but it is also a challenging undertaking. Before you can get started, you have some decisions to make. One crucial decision you have to make from the beginning is the type of business structure. We will discuss the various business structures in the United States as we also probe the role played by a lawyer when starting a business.

Types of Legal Entities

There are various business structures in the US. Bear in mind that your choice carries some tax and legal implications.

Sole Proprietorship

A sole proprietorship is the simplest form of business entity to establish. It is an independent venture that is run by one individual. The owner and his or her business are treated as a single entity. Consequently, the individual is taxed as the company. You receive all the business profits and assume all its liabilities. Formal action is not necessary to start a sole proprietorship. As the sole owner, you achieve this status by engaging in business activities. But, like any business, you need to attain the required permits and licenses.


A partnership is a business venture that is owned by two or more people. All partners have a responsibility to contribute to all the aspects of the business, including capital, assets, labor and skill. As a result, they take part in all the business’ profits, losses and taxes. Since more than one person makes the decisions, it is crucial to draft a legal partnership agreement. Partnerships are divided into three categories, including general partnerships, limited partnerships and joint ventures.


A corporation is a sovereign business structure owned by shareholders. Thus, it is the corporation and not the shareholders who are liable for its debts and losses. Formation of a corporation is more complex and costly compared to other entities and is guided by the laws of the state where it is formed.

Limited Liability Company (LLC)

An LLC can be best described as a hybrid of a partnership and a corporation. It borrows the operational adaptability and tax capabilities of a partnership. From a corporation, it borrows the feature of limited liability. Owners of an LLC are referred to as members. Members of an LLC can include one or more individuals, other LLCs or corporations. An LLC is not considered a distinct tax entity. As a result, it is mandatory for all LLCs to file a sole proprietorship, corporation or partnership tax return.


A cooperative is an organization that is owned by and run to benefit its members. All the proceeds from the cooperative are shared among its members. Cooperative members are also called user-owners. Since everyone cannot be involved in running the business, the administrative function is left to an elected body known as the board of directors. User-owners control the direction of the organization by way of voting. You can become a member by purchasing shares in the cooperative although the number of shares does not influence the power of your vote. To form a cooperative, potential members must reach a consensus on mutual need and policy to cater for that need.

Why a Lawyer is an Invaluable Asset

It is prudent to factor in the legal implications of your business policy. Thus, a lawyer is as crucial as any other aspect of your business. Here are some reasons why you should consider seeking an attorney to set up a business.


When you incorporate your business, you create a legal separation between yourself and the venture. By doing so, you are protected from any liability the business incurs.

Drafting Contracts

A company may need an agreement for its partners, employees and investors. You may also enter a contract for supplies, services or space. Any slight breach of the contracts may land you in court.


You may have various sources of capital for your startup including personal savings, venture capitalists, seed investors or crowdfunding. Each funding method could raise a legal issue, often reliant on the investor’s sophistication.

Choosing Business Form

A lawyer will help you decide on the best legal entity based on your finances, strategy and goals.

Registration, Licensing and Permits

Some business structures need to be registered with the government for recognition. While some may not need registration, they all need permits and licensing demanded by corporate law.

Multi-State Business

The preconditions to starting and operating a business may differ from one state to another. A lawyer will prevent you from losing the rights you enjoy in your home state when doing business in a visitor state.


Various business entities have their own tax merits and demerits. Your attorney is better placed to understand and help with your business’ tax requirements.

These are reasons why a lawyer is an invaluable addition to your strategy when setting up a business. Tough Law Firm welcomes the opportunity to help you set-up your business correctly. Please contact us to schedule a consultation.

Diana Tough

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