Choosing a Legal Entity for Your Business

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• Deciding a Legal Entity

Starting your own small business can have obvious allure, and encompasses a vast spectrum of potential enterprises. You might be anticipating hiring employees, leasing or purchasing space, negotiating contracts and business licenses, bringing in investors, or developing products and creating a manufacturing operation. There are a million small details that go into launching any new business, and if you’re taking the plunge, you’ll want to do as much advance planning as you can. Working closely with a lawyer who specializes in assisting startups is an important protection to help you launch.

Deciding a Legal Entity

One decision you’ll need to make before opening your doors is your legal entity. The legal form of your Oregon business defines what personal liability you face for business debts and legal obligations, as well as how you are taxed and whether the business will survive you. The following are different business entity options and how they’re viewed in the state of Oregon. After you decide, you must register it with the secretary of state.

• Sole Proprietorship—Being a sole proprietor is the simplest form of business operation, and doesn’t require any formal registration, but if you are operating under a name other than your own, you’ll need to register your assumed business name. If you have employees, you’ll also need to obtain an Employee ID Number (EIN). Income to the business is considered the same as income directly to you, and you pay federal taxes for the business on your personal income tax return. Similarly, liabilities incurred by the business flow directly to you, and you remain personally responsible for any business obligations.
• Partnership—A general partnership between two or more individuals does not require formal registration, but it is good to have a detailed partnership agreement between co-owners. Debts and obligations of the business belong to all partners, meaning you could be liable for something one of your partners incurs, though this may be addressed in the partnership contract. Each partner reports their respective income and is taxed on that basis. You may also register as a limited liability partnership, which has a number of formal requirements and provides liability protection to the individual partners.
• Corporation—A corporation is a separate legal entity from its owners, with the ability to enter contracts, be sued, own assets and pay its own taxes. It is owned by shareholders who receive shares of the profits but do not have liability for corporate actions or debts, and typically is run by a board of directors. When incorporating, you’ll need to decide whether to establish an S or C corporation, which are taxed differently and have different limits on shareholders. A corporation survives the death of any single shareholder.
• Limited Liability Company (LLC)—This popular form of entity is something of a hybrid between a sole proprietorship and a corporation, allowing for the liability protection benefits of a corporation without many of the formal requirements. LLC profits can flow through to the business owner’s tax return and its losses can offset other personal income. Unless there’s an alternative provision in place, an LLC will not survive either the death or bankruptcy of a partner.

Which one should you choose? It’s best to consult with an experienced business attorney who has worked with similar startups. While online services can provide you with technicalities like LLC registration at an attractive price, this is one of those places where you may get what you pay for. There are plenty of potential glitches that could cost you money or even your business. Be sure to research and interview lawyers to find the one that suits your needs. For general information on business structures, articles of incorporation, operating agreements, types of businesses (business types), nonprofit corporations, and articles of organization, see our business organizations overview and our overview of S corps.