Choosing the Right Legal Form

Choosing the Right Legal Form
Column by Jay Ebben, Ph.D.

One question that always needs to be answered when starting a business is "What legal form of organization makes sense?" This may be a more important question than you think, as legal form can have significant implications on your personal risk in the business as well as your potential for financial returns. You will want to get some advice from an attorney prior to making a final decision, but what follows here are some issues that will help you understand the differences between forms.

Liability protection. The legal forms that you are likely to consider are sole proprietorships, partnerships, limited liability companies (LLCs), C-corporations, and S-corporations. You can generally rule out sole proprietorships and partnerships right away because of lack of liability protection. With these two forms, the business is not regarded as a separate legal entity from you, so your personal assets are part of the business. This means that if the business is sued for whatever reason, your personal assets are at stake. In a partnership, you have even more liability: your personal assets are on the line for anything that your partner may do. LLCs, C-corporations, and S-corporations are viewed as separate legal entities. What is at stake for you as an owner is what you have put into the business along with any personal guarantees you have made.

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Jay Ebben, Ph.D., is an Assistant Professor of Entrepreneurship at the University of St. Thomas in St. Paul, Minnesota. At St. Thomas, he teaches undergraduate and graduate courses on opportunity assessment, fundraising and financial resource management, and new venture strategy, and advises a group of students that are in the process of starting their own businesses.

His background includes the start-up of two businesses as well as extensive consulting experience in the areas of strategy, fundraising, and business plan development. He holds a Ph.D. and MBA in Entrepreneurship from the University of Wisconsin-Madison and a B.S. in Industrial Engineering from Marquette University.

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