BUSINESS STRUCTURE

Choosing the right legal structure is a necessary part of running a business. Whether you're just starting out or your business is growing, it's crucial to understand the options.

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In this section, we are going to cover the four main types of legal structure.

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SOLE PROPRIETOR

A sole proprietor business is simply a business that is owned by a single individual.

 

What’s good about it?

• Simple to organize.

• Owner makes all decisions.

• Minimum legal restrictions.

• Owner receives all profits.

• Business is easy to discontinue.

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What’s bad about it?

• Owner has unlimited liability.

• May not be able to raise capital.

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PARTNERSHIP

A partnership is a relationship between two or more persons who join together to carry on a trade or business.

 

There are two types of partnerships:

• General Partnership: Agreeing with one or more individuals to jointly own or share the profits of a business. There is no limit on the number or type of partners (individuals, other partnerships, or corporations).

• Limited Partnership: Consists of one or more general partners (those who are generally liable for the business) and one or more limited partners (those who have limited liability). Organizers must file organizing documents with the Secretary of State.

 

What’s good about it?

• Easy to organize.

• Greater financial strength than sole proprietor.

• Combines skills and judgments.

• Define legal status.

• Each partner has personal interest.

 

What’s bad about it?

• Unlimited liability for each partner.

• Decision authority is divided.

 

CORPORATION

The two main types of corporations are:

• C Corporation: Income goes to the corporation. Dividends are paid to stockholders.

• Sub S Corporation: Income is taxed similar to partnership. Income and expenses are divided among

shareholders who report on individual income tax returns.

What’s good about it?

• Life of corporation is perpetual.

• Stockholders have limited liability.

• Transfer of ownership is easy (sell stock).

• Management may be more efficient

 

What’s bad about it?

• Subject to special taxation.

• Cost more to organize.

• Subject to State and Federal controls.

• Charter may restrict type of business activities.

 

A corporation would only be necessary if you foresee your company going public (selling stock) or seeking
lending not personally guaranteed by the owners or members.

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LIMITED LIABILITY COMPANY

A limited liability company possesses a combination of corporate and partnership characteristics. It provides the benefits of partnership income taxation with limited personal liability for the members.

What’s good about it?

• An LLC is organized to qualify for taxation as a:

  • Partnership: Two or more members.

  • A sole proprietor: One member.

• No member is liable for debts and liabilities of another LLC member.

• No limitations on what persons or types of entities may be LLC members.

• Perpetual like a corporation.

• One person may qualify for LLC status.

 

What’s bad about it?

• Tax and liability benefits vary from state to state.

• May not be used by banking or insurance companies or nonprofit organizations.

• Can elect to be treated as a corporation.