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Business Structures Overview

business-structuresStarting a business is an exciting time. It can be easy to get caught up with your ideas and your master plan to make millions. But before you hit the ground running, you should definitely also spend some time thinking about the legal considerations of starting a business. Before you start the legal process, you should work out which business structure is best. There are several business structures to choose from, and each has its own benefits and downsides.

Which business structure is best for your business depends on the nature of your business, your future goals for the business, whether you will have investors and employees, and a variety of other things. This article provides a basic business structures overview to get you started.

Sole Proprietorships

Sole proprietorships are the simplest business structures. A sole proprietorship is a one-person business structure, meaning there are no other partners or owners. A sole proprietorship does not have to be registered with the state, and there are no forms to file. Taxes are paid on your individual tax return. All you need to do to form a sole proprietorship is start conducting business!

However, there are serious downsides of a sole proprietorship. The major one is that you are legally considered the same entity as your business. This means you don’t get the benefits of a corporate shield or limited liability.

So, if someone sues your business or you owe a lot of debts, your personal assets are on the line. Your creditors may be able to seize your house, your personal bank account, your car, etc. if the business does not have enough assets to pay back the money owed.

For very small businesses with low income that do not expose themselves to much liability, this may not be a concern. However, you never know when someone is going to sue you or why. Plus, assuming that you eventually want to grow the business and generate more money, it’s usually better to set it up to properly protect yourself from the beginning.

General Partnerships

A general partnership is quite similar to a sole proprietorship. You can start a general partnership without registering with your state or filing any legal paperwork. All you need to do to form a general partnership is to find one or more partners and start conducting business.

However, once again, you will not get the benefits of limited liability. All of the partners in the business can be held jointly liable if the business is sued or it goes into debt that it cannot repay. All the partners’ personal assets are at risk.

For just about any business that is set up as a partnership, it can be highly advantageous to establish one of the limited liability entities, such as an LLC or a corporation. Partnerships can be exposed to greater liability than sole proprietorships because they often undertake more activities and generate more income.

There is also the potential for disputes to occur between the partners, unlike a sole proprietorship where it’s just a single owner. Unless there are partnership agreements in place to dictate what happens, the state law will apply. This can lead to unfortunate and unwanted results in some instances.

So, if you are considering forming a general partnership, it’s usually a good idea to instead opt for an LLC or corporation. It’s also beneficial to find a business lawyer to help you structure your partnership agreements properly and to limit your liability.

Limited Partnerships

A limited partnership is normally not the business structure to choose for a small business or startup. Limited partnerships are meant for larger companies with some non-active owners (i.e. investors), so they usually do not make sense for a small business or individual. A limited partnership will also normally have to be registered with the state.

In a limited partnership, one or more general partners will be responsible for operating the business. The general partners will get funding for the business from investors who are known as “limited partners”. The general partners control operations on a day to day basis and are held responsible for any debts or liabilities, just like they would be in a general partnership.

The limited partners, on the other hand, have limited control over the operations of the business and they are not personally responsible for debts or liabilities. Their only risk is the money they invested into the business.

Limited partnerships are often used by companies that make investments, such as venture capital firms or large real estate syndicates. If you think a limited partnership might be right for your business, it is a good idea to consult an attorney before forming one to make sure it is structured properly.

LLCs

LLCs or limited liability companies are one of the most common business structures these days. For a lot of small businesses, an LLC makes the most sense.

LLCs are relatively flexible and easy to operate, but they come with the major benefit of a corporate shield. This means that you when you form an LLC, you are only risking the money you put into the company. If your company is sued, or must repay significant debts, your personal assets will be protected.

Go here to find out more about the advantages and disadvantages of an LLC. If you are considering forming an LLC, you should consult a lawyer to make sure you set it up properly. You will want to have a good operating agreement in place in order to lay out all the rules for the company.

Corporations

Corporations are considered to be an entirely separate legal entity from the owners and operators of the business. A corporation is owned by the shareholders, operated by the officers, and overseen by the board directors. Oftentimes, the officers and board members are also shareholders. But in most big companies, there are many other outside shareholders as well.

Corporations provide limited liability for the shareholders, so their personal assets are protected. However, corporations are more complicated to run than LLCs, and they involve many more formalities to be operated properly. Also, there are differences in taxation between corporations an LLCs that you should be aware of. Here is some helpful info about the difference between an LLC and a corporation to help you decide which is right for your business.

The corporate structure is good when you have a a lot of personal assets that you’d like to protect and keep separate form the business. But unless you intend to grow the business on a greater scale and plan on taking in outside funding from investors, an LLC might be a better choice.

If you are forming a corporation, it is highly recommended to work with an attorney. You must set up everything properly in order to maintain your corporate shield, and if the corporation is not properly structured, you might risk personal liability and/or significant expenses in legal fees down the road.

Nonprofit Organizations

Nonprofit organizations are defined as organizations with a strictly religious, literary, charitable, educational, or scientific purpose. They are meant to operate for the benefit of the public, not to generate income and make a profit.

A nonprofit organization is able to fundraise through both private and public sources, such as in the form of grant money, monetary donations, and in-kind donations from companies and/or individuals. Most donations are tax exempt according to the federal government.

The general idea behind a nonprofit is that the organization benefits the greater good. The vast majority of companies out there are for-profit companies that seek to generate income for the owners. However, nonprofits serve a very important role in our society as well.

If the purpose of your business is meant to give back to people and create benefits for the greater good, rather than to make money, a nonprofit is likely the right choice. You should definitely consider hiring an attorney to advise you through the process of forming a nonprofit.

Benefit Corporations

A benefit corporation, or B corporation, is a newer form of business structure. It is somewhat of a hybrid between a nonprofit and a regular corporation. A B corporation is a profit driven company, but one that is formed with the purpose of providing a positive, material impact on society.

A normal corporation has the purpose of maximizing profits and value for shareholders. Many times, this has the side-effect of reducing social goodness efforts, which typically do not help maximize profits. The B corporation structure was established for companies that wish to make social goodness a core aspect of their business, while still having a focus on creating profits.

The governance of a B corporation is largely similar to that of a normal corporation. However, the B corporation must be able to meet certain standards to qualify and maintain the status of a benefit corporation. If you are starting a company that has a significant interest in social goodness, consult with a lawyer to find out if a benefit corporation is an option for you.

Cooperatives

A cooperative is a business structure where the company is owned and operated equally by its members. The idea of a cooperative is not new, but lately there are more and more business owners looking to create a work environment that is “worker-controlled.”

Business cooperatives are also known as collectives or co-ops. In a business co-op, each member has an equal vote in all decisions and all owners share the profits equally. Typically there is a board of directors that oversees the functions of the co-op. Cooperatives are most common in healthcare, retail, agriculture, art and restaurants. Every state has different laws for cooperatives, so be sure to check out your rights and responsibilities through the office of the secretary of state.

Conclusion

Starting a business is definitely an exciting and rewarding thing for many people. But before you make too much progress, it’s important to make sure everything is legally structured in the proper way. Not doing so can end up costing you significant time and money down the road.

Having an attorney to help you decide which business structure is best for you can make a big difference. This business structures overview is a good place to start researching and get educated, but to avoid costly mistakes, you’re better off consulting an attorney to choose the best business structure for your business.