Legal Structures for Your Retail Business
Several factors should be considered when choosing the best form of business ownership when starting your retail business. The type of business structure you choose can have an impact on multiple aspects of your business, including taxes, liability, and your exit strategy.
Here are some basic forms of business ownership in the United States. There are variants from state to state, so be sure to check with your state's Secretary of State Office for specific requirements and details. It is recommended to consult with a lawyer and/or accountant to discuss your situation before filing the necessary paperwork.
A sole proprietor is an individual who owns an unincorporated business. Since no separate legal business entity is created, this is the simplest and easiest structure to form.
The benefit of a sole proprietor is the tax regulations and savings. The disadvantage is the access to services you need to run your retail store; like banks, lines of credit or investors. Since you are out there on your own with no "protection," the lender has only your personal credit history to establish a decision. So you, as the sole proprietor, are on the hook for any debt or losses of the business.
Even if you choose this type of structure, be careful not to blend your funds with the business ones. While legal, it is messy for your accountant.
A partnership is a business relationship between two or more persons. Each person in this business structure contributes labor, capital, and shares in both the profits and losses of the business.
Not every partner must have the same equity stake in the business nor must every partner have equal responsibility or time commitment. For example, you can have a partner in your retail store who merely is providing capital for you when you need it, but does not participate in the operation of the store itself.
This structure is common for a services organization like a law firm or medical practice. It is not a good structure, however, for a retail store. This type of company limits the liability of the partners. For example, if one partner is sued, the others cannot be held liable. So, again, makes senses for a law office, but not your retail store.
This type of business ownership combines several features of corporation and partnership structures. The main benefit is that the owners of the company have their personal liability protected. So, for example, a customer could sue the LLC, but not the owners personally. It protects your personal assets from any lawsuit that may be a result of the business.
A corporation is chartered by the state where it is headquartered and is considered by law to be a unique entity that can be taxed, it can be sued, and it can enter into contractual agreements.
If you are one store, this is not for you. It requires a great deal of regulatory oversight and paperwork. This structure is best if you have a small chain of stores. It is the most costly to operate since the amount of tax and legal documents that must be processed in a year raise your professional fees costs considerably on your P&L.