An Introduction to Business Forms
June 12, 2014
Making a decision to start a business is difficult, and one of the most challenging aspects of starting a new business is choosing the proper form or structure that business will take. The choice of business structure is, perhaps, most commonly understood to be a decision about what legal and tax ramifications one desires the business to result from the decision. However, consideration of what form one’s business should take should not stop at the twin pillars of Legal Liability and Tax Liability.
Though many acknowledge the legal and tax implications of various business forms, most tend to overlook or quickly gloss over the various structural benefits and potential pitfalls associated with each category of business forms. Whether because one thinks the hierarchical natures of each business form are too obvious to merit deliberate consideration or because it never occurs to him to pause to contemplate the question, examining the structural benefits and potential drawbacks to choosing one form of business over another is an important part of the process that can have serious repercussions as an enterprise grows and participates in the marketplace.
There are, generally speaking, six different types of businesses: sole proprietorships, cooperatives, partnerships, limited liability companies, S-Corporations, and C-Corporations. Of course, one might point out that S- and C-Corporations really are both variations on the same general form of business (a corporation), or one might argue that there are any number of variations of partnerships or LLCs not listed, here. With a deferential nod to the contrarian, the author begs your indulgence. Each of the general types of business structures, except for cooperatives, will be treated individually in more detail in subsequent articles, while the remainder of this article will focus on some generalizations about each one that, ideally, will give the reader a baseline of understanding required to more deeply delve into the articles to come.
The first form of business, the Sole Proprietorship, is the least costly to create. One usually only needs to acquire a business license, if required by the locality in which the business will operate, and make its goods or services available to the public. Next up on the organizational complexity scale is a Partnership. Partnerships involve two or more people, each having at least a 1% ownership stake in the business. Partnerships can limit the liability of minority partners (more on that in the coming article on Partnerships), but there must always be one General Partner who is 100% liable for all the debts and obligations of the Partnership. Both Sole Proprietorships and Partnerships are taxed as “pass through” entities, meaning each partner pays taxes as an individual, and the income of the business, itself, is not taxed at the federal level.
Finally, LLCs and S- and C-Corporations, while costly to form and operate, can provide some—and often substantial—liability protection to those who own and operate such companies. LLCs and S-Corporations can be structured as pass-through entities, but C-Corporations cannot. The greatest benefit of organized or incorporated companies, beyond their legal liability and tax liability benefits, is the strength and flexibility of their hierarchy. Such company structures are designed for growth, collaboration, and capital generation. While forming a company is not always necessary for every business, certain benefits—and costs—accrue to companies that are unavailable to other businesses, making them desirable for many businesses.
Please bookmark www.ExecutiveLP.com and return over the next couple weeks as we continue the discussion on our blog about choosing the proper form or structure a business can take. If you need legal counsel—and we believe every business does—please contact Executive Legal Professionals and let us know what concerns you have. We will quickly follow-up with you and do all we can to see your legal needs are efficiently and effectively addressed by a qualified legal professional. If your need is urgent, please call Executive Legal Professionals at +1.615.669.6566.
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