Legal Form: Find your perfect business structure

As a business owner, one of your first decisions you'll be required to make among many, is determining how your company should be structured. This initial decision will have long-term implications on the way your company will function. Options include sole proprietorships, partnerships, corporations and non-profits.

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Legal Forms Overview: How to structure your business

When figuring out which is the best legal form for your endeavors, you'll need to take into account: 

  • liability issues
  • tax obligations
  • investment needs
  • size and scope of your business
  • the level of control you wish to have as well as
  • your business's expected profit.

These options are available:

1. Sole Proprietorships

Most small businesses begin as sole proprietorships. It is the easiest and least expensive form of ownership to organize, for the business is only owned by one person.

You are personally liable

The sole owner is legally seen as one in the same with the business. Sole proprietorship means you, as the business owner, are responsible for running your business and therefore also responsible for its liabilities and debts.

You are in complete control

On the upside, sole proprietors are in complete control of their business and may keep or reinvest all income generated by the business.

Difficulties with financing 

However, most people who choose this form have difficulties when raising funds and often have to turn to using their own personal savings or consumer loans. 

2. General Partnership

In a partnership, two or more people share ownerships of a single business; these people are also legally seen as one in the same with the business.

Contract governs rights and obligations

A legal agreement between the business partners outline how decisions will be made, profits will be shared, disputes will be resolved, and what steps will be taken if the partnership needs to be dissolved. Like sole proprietorships, partnerships are easy to establish and with more than one owner, the capability to raise funds for your business may be improved.

Sharing is caring

Having a business partner also means you are not fully responsible for the daily functioning of your business. Some drawbacks of partnerships are that you must share your profits with others, decisions must be agreed upon and disagreements can occur. 

3. Limited Partnership (LP)

A partnership in which most of the partners have limited liability (with regards to the investment) and also limited input regarding management decisions is know as a limited partnership.

Complicate to set up

Unlike a partnership, it can be quite complicated to establish and thus may not be the best choice for a small business which has the potential for personal liability.

Complex liability issues

The general partners are responsible for any debt or liabilities that the limited partners have, unless the general partner is a corporation or a LLC (see below). The limited partners are not personally liable for the limited partnership liabilities and are consequently usually not included in the day-to-day operation of the business. 

4. Limited Liability Partnership (LLP)

An LLP is a business form that includes elements of a general partnership as well as of a Limited Liability Corporation (LLC). It is similar to a general partnership in that the partners actively share the management of the day-to-day affairs of the business. Like a LLC, all the partners receive limited liability protection. 

5. Limited Liability Limited Partnership (LLLP)

An LLLP is a modification to a limited partnership, in which there are one or more general partners and one or more limited partners.

Limited liability to all partners in the partnership

However, unlike a LP, the key advantage of this type of ownership is that the general partners receive limited liability on debts and obligations incurred by the company. It was designed to offer limited liability to all partners in the partnership, not just the limited partners. This form is not supported by every state. 

Basic knowledge for successful entrepreneurs

Start a business in easy steps

Starting a new business is an exciting experience that is often very rewarding for those who choose to take the risk. With the proper preparation and support it is a very achievable goal for those who have a good business sense and reasonable entrepreneurial skills.

6. Corporation - C corp

Unlike sole proprietorship or partnerships, a corporation also known as a C Corporation is legally considered to be a unique entity, separate from those who own it.

Taxation matters twice

This also means that its profits are taxed separately from its owners. The profits are taxed at a corporate rate and double taxation is possible. The owners of a corporation are essentially its shareholders.

A C corp is a costly affair

Creating and maintaining a corporation can be very complex and costly. Additionally, corporations are monitored by federal, state and some local agencies resulting in more paperwork; however, depending on the type of business you are planning to start, it can be worth it.

Additional funding options

Corporations can raise additional funds through the sale of stock and, if certain requirements are met, can gain S corporation status enabling the company to be taxed similar to a partnership. 

7. Corporation - S corp

Like a C Corporation, an S Corporation is owned by its shareholders, but its income is passed through to the shareholders, meaning it is not at risk of double taxation.

Benefit from tax advantages

An S Corporation passes its corporate income, losses, deductions and credit through to its shareholder and is thus taxed like a sole proprietor. The main advantage of forming an S Corporation are the tax benefits. 

8. Professional Corporation (PC)

A PC was designed to provide certain licensed individuals with a business entity under specific regulations. A PC will provide personal liability protection from business loss and risk. However, since this business form is often for licensed professionals, it does not absolve the responsibility of professionals for their professional actions (malpractice). 

9. Limited Liability Company (LLC)

This form of company, which is not permissible in all states, is similar to a corporation; although an LLC is, in most cases, taxed as a partnership. It provides the limited liability features of a corporation and the tax options and management flexibility of a partnership.

10. Professional Limited Liability Company (Professional LLC)

This business form is suited for professionals who are required to have a state license to provide services, such as a doctor, chiropractor, lawyer, accountant, engineer, etc. It provides the benefits of a Limited Liability Company, i.e., personal liability protection from business loss. 

11. Non-profits (NPO)

By definition, a non-profit is an organization (NPO) that does not distribute its surplus funds to owners or shareholders, but rather uses them to help achieve its goals. Like the term itself says, a non-profit organization is not seeking to produce profit.

No taxes 

Qualified organizations pay no tax on federal, state, and local taxes, and can therefore apply a large portion of their resources to pursuing their goals. A NPO can also qualify for special grants or government funding.

Acting as a corporation

Aside from the financial benefits and tax-exempt status, an additional advantage is that nonprofits exist as corporations. This means they posses all the benefits of corporate status, such as shielding owners and managers from personal liability. However, running a NPO often comes with the inability to pay members beyond reasonable salaries and limitations on the sources of income.

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