Understanding Business Law: What You Should Know
Starting and operating a small business takes time, dedication and an extensive knowledge of how the process works. Not only is it crucial to choose the right legal structure for a new company, but there are a host of other factors that come into play when getting a new business off the ground.
People who want to have full decision-making power and run the business on their own may want to choose a sole proprietorship structure for their company. Although sole proprietorships allow entrepreneurs free rein over their business ventures, sole owners are also responsible for any problems that may arise. Sole proprietors can enjoy all of the business’s successes, but they are also solely responsible for any debts, liabilities and failures that occur when running the company.
Partnerships involve more than one party and can be joint venture, limited or general in nature. Joint venture partnerships are often created for one project or with a single goal in mind. Limited partnerships not only involve the partners who form the business, but other investing partners as well. Although the founding partners are liable for the ultimate success or failure of the company, investing partners only risk losing their portion or investment into the company. Partners have the option of splitting the company equally or taking different portions of the business.
Limited Liability Corporations
Limited liability corporations give business owners protection from certain liabilities in the company, such as lawsuits, judgement or debts, much like corporations. However, this business structure offers companies flexibility when it comes to organizing management. Owners who choose an LLC structure are required to pay federal and state taxes on their business.
Business owners who are interested in organizing a company that serves the public may be able to form a nonprofit organization and apply for a tax-exempt status. Businesses that are formed for educational, religious, charitable, scientific or literary reasons may be considered nonprofit. Nonprofit organizations are eligible for grants from personal or public investors. When a nonprofit organization is incorporated, the owners of the company are not held liable for lawsuits or debts that may stem from the company’s activities.
Corporations are different than any other type of legal structure in that they are considered a separate entity from the businesses’ owners. Due to this distinction, owners are only required to pay income taxes on profits that they take from the company, such as wages and bonuses. However, any profits that remain within the company are paid by the corporation. Corporations are able to offer stock to the initial owners and members of the company and/or to the public at large. Offering stock options is a great way to gain capital for the company, which can help to grow the business. Corporations also come with set management structures, involving a board of directors, directors, members and shareholders.
Choosing a Legal Structure
When choosing a legal structure, business owners may want to take several factors into consideration, including how many partners are involved in the venture and how the company is going to be financed. Is the business high risk? Are there potential lawsuits or judgements that may be brought against the company? If so, the owner may want to select a structure that has liability protection as opposed to a sole proprietorship or partnership, where the owner is ultimately held responsible. The owner(s) should also take into account their income tax needs. In some cases, it may be more profitable if the company becomes incorporated. This would make it a separate tax entity from its directors, members and investors. Business owners who have partnerships, LLCs and sole proprietorships must pay personal taxes on their businesses.People should keep in mind that business structures can change as a company grows and transitions in the market. For example, the owner of a sole proprietorship may decide to add a partner and change the company into an LLC or partnership.
Business Formation Quickstart
Forming a business requires completion of several steps. These steps vary depending on which business structure the owner chooses for his or her company. While every company should start by creating a company name, there are differences in documentation, financing, management structure, insurance and taxes. For instance, people who want to start a sole proprietorship or partnership are not required to fill out as much paperwork as people interested in creating an LLC, corporation or non-profit organization. In addition, a new business may need to acquire special licenses and permits depending on which industry they are operating in. These documents can vary by state.
When you are passionate about starting a new business, you want to make sure that you do all of the right things to put your company on the road to success. In some cases, you may want to obtain legal help to ensure you don’t overlook a crucial detail that may make or break the starting of your business venture.
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.