Legal Business Organizations
Jon Hixson
MBAD - 295
12-12-1998
One of the most important decisions in starting a new business is selecting the type of legal business structure to suite your needs. While there are many facets to consider when making this decision, there are a couple of points that need to be made that are often overlooked. First, choosing a legal structure does not need to be the most costly decision of a new business owner. Often a new business simply needs a legal entity to accommodate tax laws and local regulations. Second, businesses and their organizational needs change over time. Do not be afraid to review your business structure to ensure that your priorities are still compatible with the legal entity of your business structure. Look to review your business structure as thresholds are passed in sales, profitability, and as ownership challenges, such as generational change, appear on the horizon.
Common factors to be considered in determining a business organization include:
There are several basic business structure used today. It is important to note that several of the common structures used today are not identical in each state, always check with the state government division to know the local options and requirements. In addition, the low-cost options, such as incorporating in Delaware, should be explored. Common business structures include the following options:
Sole Proprietorship
The most common form of business structure, this is the easiest and least costly way of starting a business. A sole proprietorship can be formed by finding a location and opening the door for business. There are likely to be fees to obtain business name registration and other necessary licenses. The individual alone is responsible for the liabilities and taxes associated with the business.
General Partnership
A general partnership is owned by two or more persons. Partnerships can be formed by an oral agreement, but a legal agreement is usually recommended to establish responsibilities of each partner. A partnership agreement could be helpful in solving any disputes. Each partner is responsible for the business taxes and liabilities that may result from the business. No tax is imposed on the partnership itself. Partners are responsible for the other partner's business actions, as well as their own.
Limited Liability Company
Limited liability companies or partnerships is a business entity designed to combine the liability protection of a corporation with the flexible management options of a general partnership. These business entities are established by each individual state. If properly structured, an LLC can have tax treatment similar to a partnership.
Corporations
Corporations operate as a separate entity apart from the owners. Liability is generally limited to the corporation itself and the strongest protections are offered to the owner. The principle types of corporations are subchapter S and subchapter C. S - corporations have greater limitation on stock ownership and offer the same tax pass-through treatment as a partnership, where taxes are paid once by the owners as income. C - corporations receive "double taxation" as income taxes are first paid by the business and then paid by the owner through the form of dividend taxes. The corporate structure is usually the most complex and more costly to organize.
Internet Related Sites
1. http://www.sba.gov/starting/indexstartup.html
A good site to begin with, covers basic business structures and a good range of start-up issues.
2. http://www.office.com/biztools/legal/index.html
A free, commercial site covering more details of the legal aspects of each form of business entity.
3. http://www.businessweek.com/smallbiz/index.html
A great site with concise points on each business structure. Site is free for subscribers of Businessweek Magazine or can be accessed for a fee.
4. http://www.sba.gov/ADVO/research/rs154.html
This site lists a research paper that examines small business structure and the taxation issues.
© 1998 by Jon Hixson
This document may not be reproduced in whole or part without the prior written permission of Jon Hixson.