Have you ever entertained the idea of starting your own business? The exhilaration of being an entrepreneur is not for the weak of heart. And, in legal terms, knowing what type of business you want to be is a critical question to ask from the outset.
In the eyes of the law, businesses have many of the same rights and responsibilities as a person. They may buy, sell, and own property; enter into leases and contracts; and bring lawsuits. They pay taxes and can be prosecuted and punished (often with fines) if they violate the law. The chief advantages are that they can exist indefinitely; beyond the lifetime of any one member or founder, and that they offer the owners the protection of limited personal liability.
Business formations in the United States are regulated by State authorities. Additionally, a few federal laws affect business formation considerations as well, such as federal tax laws, employment laws, etc.
Here is what you need to know about each type of business formation:
A form of business in which one person owns all the assets of the business in his or her own name. A person who does business for himself or herself and who does business without formally creating a separate business organization is engaged in the operation of a sole proprietorship. Many small businesses operate as sole proprietorships, including professionals, consultants, and other service businesses. Often, these are businesses that require minimal amounts of capital.
A sole proprietorship is not a separate legal entity, like a partnership or a corporation, and thus, no legal formalities are necessary to create this form of business, other than appropriate licensing to conduct business and registration of a business name if it differs from that of the sole proprietor. Because a sole proprietorship is not a separate legal entity the sole proprietor must report income and expenses from the business on Schedule C of her or his own personal federal income tax return.
These are joint businesses in which responsibility for management, profits, and, most importantly, the liability for debt is shared by the general partners. Anyone entering into a general partnership must remember that each general partner is liable for all the debts of the partnership. Furthermore, any partner alone can bind the partnership on contracts. In essence, a general partnership is a collaboration between two or more sole proprietors.
Are a special type of partnership which are very common when people need funding for a business, or when they are putting together an investment in a real estate development. A limited partnership requires a written agreement between the business managers, who are general partners, and all of the limited partners. Each limited partner makes an investment of funds into the partnership and is supposed to receive a predetermined share of the profit, which is ordinarily greater than that of each of the general partners. The maximum number of limited partners is set by state law to prevent using interests in the limited partnership as if they were shares of stock in a corporation. In addition to priority in profit, tax deductions, and potential share in the success of the enterprise, the limited partner is “limited” in potential loss, since all he or she can lose is his or her investment, and the general partners alone are subject to claims, debts in bankruptcy, and lawsuits against the partnership. Limited partnerships must file their name and names and addresses of general partners with the Secretary of State or other designated officer in the state in which the partnership is created so the public can find out who the responsible parties are.
Are organizations formed with state governmental approval to act as an artificial person to carry on business, which can sue or be sued, and can issue shares of stock to raise funds with which to start a business or increase its capital. Corporations become separate legal entities from their owners, so liability for debts or damages caused by the corporation are limited to the company’s assets. There are two primary types of corporations: S Corporations and C Corporations. The biggest differences between the different types of corporations have to do with how stocks are held and how taxes are assessed.
Limited Liability Company (LLC)
Is a non-corporate business whose owners actively participate in the organization’s management and are protected against personal liability for the organization’s debts and obligations. The LLC is a hybrid legal entity that has both the characteristics of a corporation and of a partnership. An LLC provides its owners with corporate-like protection against personal liability. It is, however, usually treated as a non-corporate business organization for tax purposes.
If you are interested in setting up your own business, or have questions about your company and would like to speak with one of our associates personally, please contact us here.