Once you make the decision to start a business, you need to consider the structure around which you will build it early on. There are several types of structures, each fitting a different kind of business and different kinds of people:
- Sole proprietorships
- Limited partnerships
- Limited liability companies (LLC)
- Co-operatives (Co-Ops)
- Nonprofit corporations
This is, for the most part, the simplest way to structure a business in which there is a single owner. As the owner of a sole proprietorship, you have no paperwork that needs filing or fees that need paying in order to get things set up. All you need to do is commence your daily operations. Legally speaking, you and your sole proprietorship are considered one and the same thing. Therefore, any profits made by the business will be taxed as personal income, and any business liabilities are also yours.
Partnerships are similar to sole proprietorships in the sense that they are just businesses that are owned by two or more people, and no fees or paperwork need to be accounted for in order to establish one. Additionally, business profits are also taxed to each partner as personal income and any claims, debts or liabilities are all shared. Partnerships and sole proprietorships are solid choices if your business is simple, meaning that any problems related to any kind of personal liability really aren’t of much concern because the products or services offered are not complicated or potentially dangerous.
These are dissimilar to traditional partnerships because they cost money and involve taking care of multiple intricacies in order to be properly set up. If your business does not have reasonable personal liability potential, then this is not the best route for you. A limited partnership consists of a few organizing general partners who convince others to come on board as limited partners.
Daily operations are mostly run by the general partners and are subject to any judgments, debts and other liabilities accrued by the business. Much like a traditional partnership, the general partners share business profits, which are taxed as personal income. Limited partners are not connected to any of these liabilities and to not have a hand in daily operations.
Limited partnerships are most commonly used in projects for real estate investment and in the film industry. In some states, a limited partnership is allowed to turn into a limited liability partnership (LLP), which removes liability for actions taken by other general partners and the business itself.
Corporations and LLCs
Though a corporation or LLC will likely be complicated and costly to start and maintain, it could be the best option for your business, depending on the industry. The main personal benefit of having a corporation or an LLC is that you are protected from any liabilities that come out of the dealings conducted by your small business.
A corporate structure is unique in that the business becomes a tax and legal entity all on its own. The corporation pays profit taxes, meaning that the owners’ income taxes are based solely on things such as salaries, bonuses and dividends.
LLCs provide similar shielding from personal liability as the corporation structure. However, the two differ when it comes to taxes, where the owners of an LLC are responsible for paying income taxes on business profits.
Nonprofit corporations are created with the purpose of carrying out operations of a literary, scientific, religions or charitable nature. The nonprofit may ask for public or private donations, which usually are not taxed.
Members of a co-op own and operate the business by democratic means. Co-ops are often formed by consumers for a friendlier business such as a grocery store.
With this information, you should be able to get a solid idea of which structure is right for your business going forward.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.