The key to running a business is choosing the right legal structure. It doesn’t matter if you’re just starting your business or if you’re growing it, it is important to know the options.
- A partnership can be either a sole proprietorship, limited liability partnership or a partnership depending on its funding and liability structure.
- If it is not proven that members acted illegally, unethically, or recklessly in the conduct of business activities, they are exempt from personal liability under an LLC.
- To secure additional funds for growth, corporations can sell shares of stock. Sole proprietors cannot access funds through their personal accounts. They can use their credit cards or take on partners to get funds.
- This article is intended for small business owners who want to know more about the various legal structures that are available for their business.
money.defendthegrave.com The first step in choosing the right legal structure is to analyze your company’s goals. Next, consider local, state, and federal laws. You can choose the right legal structure for your company by defining your goals. You can adjust your legal structure as your business grows.
To help you choose the right legal structure for your company, we have compiled the most popular types of business entities.
Different types of business structures
Sole proprietorships, partnerships and limited liability companies are the most popular types of business entities. We’ll explain each type of legal structure in detail.
1. Sole proprietorship
This is the simplest type of business entity. A sole proprietorship is a business entity where one person is responsible to all profits and liabilities.
Deborah Sweeney is the CEO of MyCorporation. This entity doesn’t offer separation or protection for personal and professional assets. If your business grows, more aspects could be held liable.
Costs for proprietorship vary depending on the market where your business operates. Your initial expenses will include state and federal taxes, taxes, equipment, bank fees and any professional services that your business contracts. These businesses include tutors, babysitters, bookkeepers and tutors.
These are just a few of the many benefits of this business structure.
- Simple setup. The sole proprietorship structure is the easiest to set up. This structure is best if your business is solely owned by you. You don’t have to answer to any executive boards or partners, so there is not much paperwork.
- Low cost. Prices vary depending on where you live, but generally the only fees associated to a proprietorship include license fees and taxes.
- Tax deduction. You and your business can be eligible for certain tax deductions such as a deduction for health insurance.
- Simple exit. It is simple to form a proprietorship and it is even easier to exit one. You can disband your business as a single owner at any time without the need for formal paperwork. If you open a daycare, and decide to close it, you can just stop operating it and stop advertising your services.
Here are some examples of sole proprietorships
One of the most popular small business legal structures is the sole proprietorship. Many well-known companies began as sole proprietorships, and grew to multi-million-dollar businesses. A few examples include:
- JC Penny
- Marriott Hotels
The entity can be owned by more than one person. There are two types of partnerships: one is a general partnership where all profits are shared equally and the other is a limited partnership where only one partner controls its operation and the other contributes to or receives a portion of the profits. A partnership can be a sole proprietorship (SO) or a limited liability partnership, depending on its funding and liability structure.
Sweeney stated that this entity is perfect for anyone looking to start a business together with a friend, family member or business partner. A partnership allows partners to share in the profits and losses and makes decisions within the business structure. You will be held responsible for both your decisions and those made by your business partner.
A general partnership costs more than a sole proprietorship. However, it’s less expensive than a sole partnership. Price ranges can be affected by the experience and whereabouts of the attorney. To be successful, a general partnership should be win-win for both parties.
Google is an example of such a business. Google is an example of such a business. In 1995, Larry Page and Sergey Brin co-founded a small search engine that became the world’s leading search engine. While completing their doctorates at Stanford University, the co-founders met and then left to create a beta version. Soon after they met, they raised $1million in funding from investors and Google started receiving thousands of visitors per day. They have a net worth of almost $46 billion due to their combined ownership of 16% Google.
These are some benefits of a business partnership.
- It is easy to create. There is very little paperwork required to form a sole proprietorship. If you are required to operate under a false name (doing business as), you will need to file a Certificate of Conducting Businesses as Partners and draft an Articles of Partnership agreement. These fees can be costly. You will also need a business license.
- Potential for growth. Having more than one owner makes it more likely that you get a loan . If you have less than stellar credit, banks may consider multiple credit lines.
- Special taxation. General partnerships must file federal tax Form1065 and state returns. However, they usually do not pay income taxes. Each partner must report the shared income and loss on their individual income tax returns. If you open a bakery together with a friend, and structure the business as an LLC, you are both co-owners. Each partner brings their own experience and capital, which could impact the share of the business as well as the contribution of each owner. Let’s suppose you contributed the most seed capital to the business. It could be decided that your share percentage is higher, and you become the majority owner.
Here are some examples of partnerships
Partnerships are the next most popular type of business structure, after a sole proprietorship. Here are some examples of partnerships that have been successful:
- Warner Brothers
- Hewlett Packard
- Ben & Jerry’s
3. Limited liability company
A limited liability corporation (LLC), is a hybrid structure which allows owners, shareholders and partners to limit their personal liability while still enjoying the flexibility and tax benefits of a partnership. If it is not proven that members acted illegally, unethically, or recklessly in the conduct of the business’ activities, an LLC protects them from personal liability.
Brian Cairns CEO of ProStrategix Consulting stated that limited liability companies were established to give business owners the same liability protection as corporations, but allow earnings and losses to be passed on to the owners through income tax returns. LLCs can have one or several members. Profits and losses don’t have to be shared equally between members.
The state filing fees are included in the cost of creating an LLC. They can vary from $40 to $500 depending on where you file. In New York, for example, you will need to pay a $200 filing charge and a $9 biennial fee. You must also file a biennial report with New York Department of State. [Read our step-by–step guide on how you can start an LLC].
While LLCs are possible for small businesses, many large companies choose this legal structure. Anheuser–Busch Companies is one example of an LLC. It is one of the most prominent players in the U.S. beer market. Anheuser-Busch, which is headquartered in St. Louis (Missouri), is a wholly-owned subsidiary of Anheuser-Busch InBev. This multinational brewing company is based in Leuven in Belgium.
Examples of LLCs
Although the LLC is most common among accounting, tax, and law firms, other types of companies can also file as LLCs. These are some of the most well-known examples:
- Hertz Rent-a-Car
A corporation is considered an entity independent of its owners by law. It is an entity that has its own legal rights and can sue, be sued and own and sell property. Stocks are also available for sale. The fees for filing corporation paperwork vary depending on the state and what category they fall under. In New York, for example, the C corporation and S corporation fees are $130. The nonprofit fee is $75.
- C Corporation owned by shareholders are taxed separately. Morgan Chase & Co., a multinational financial services holding and investment bank, is listed as a corporation. Many larger companies such as Apple Inc. and Bank of America file for C corporation status because they allow unlimited investors.
- Scorporations are designed for small businesses. They avoid double taxation and can be used as partnerships or LLCs. The owners also have limited liability protection. Widgets Inc., an S-corporation that is very simple to operate, has its employees subject to FICA Tax while additional profits distributed by the S corporation are exempt from FICA tax.
- Benefit corporations are for-profit entities that have a positive impact on society. The Body Shop is recognized for its commitment to social and environmental movements. It has been awarded the B-corporation status. The Body Shop advocates for lasting change in issues such as human trafficking, domestic violence and climate change.
- Closed corporations are typically managed by a few shareholders and have limited liability protection. They are not publicly traded. Privately held corporations are more flexible than publicly traded ones. Hobby Lobby, a closed corporation, is a family-owned and privately held business. Hobby Lobby stocks are not traded publicly; instead, they have been assigned to family members.
- There are open corporations that can be traded on a public exchange. Open corporations are a common type of corporation. Each corporation owns the company and anyone can invest.
- Nonprofit organizations exist to help others and are rewarded with tax exemption. The Salvation Army and American Heart Association are examples of non-profits. These business structures are not for profit.
This business structure has many advantages:
- Limited liability. Stockholders aren’t personally liable for any claims against your company; they are only responsible for their personal investments.
- Continuity. Corporations are unaffected by the death of its owners or the transfer of shares. Investors, creditors, and consumers prefer that your business continue to operate indefinitely.
- Capital. When your business is established, it’s easier to raise large amounts from multiple investors.
This type of business suits businesses that are more advanced in their growth than startups based in a bedroom. If you have a shoe business and have named it, elected directors and raised capital from shareholders, then the next step is to incorporate. This allows you to operate your business at a higher, but more profitable, rate. Your business may also be eligible to file as an S-corporation for tax benefits.
Here are some examples of corporations
It’s a good idea to incorporate your business once your company has grown to a certain size. You can find many examples of corporations that are popular, such as:
- General Motors
- Exxon Mobil
- Domino’s Pizza
- P. Morgan Chase
The same people who own a cooperative (co-op), are also the owners. The company’s members (also called user-owners) benefit from its offerings. They vote on the organization’s direction, mission, and share profits. Cooperatives have many advantages:
- Less taxes A cooperative is not like an LLC in that it doesn’t tax its members based on their income.
- Increased funding. Federal grants may be available to cooperatives that will help them get off the ground.
- Get better service and discounts By leveraging their business size, cooperatives can get discounts for their members.
Creating a cooperative can be complicated. You will need to choose a business name which indicates whether the cooperative is a corporation (Inc.) limited. The state-specific filing fees associated with co-op agreements vary. For example, in New York, the filing fee to incorporate a business is $125.
CHS Inc. is an example of a cooperative. It is a Fortune 100 company that is owned by U.S. agriculture cooperatives. CHS, the nation’s largest agribusiness cooperative reported a net income in the fiscal year ended August 31, 2019, of $829.9 millions.
Examples of cooperatives
Co-ops, unlike other business types, are owned by the people who serve them. Some examples of co-ops are:
- Land O’Lakes
- Navy Federal Credit Union
- Ace Hardware
Consider these factors before you choose a business structure
It can be difficult to decide the structure for a new business that falls into one or more of these groups. Consider your startup’s financial requirements, risk tolerance and growth potential. After you have registered your company, it can be difficult to change your legal structure. Make sure to do this thorough analysis during the initial stages of your business formation.
These are important considerations to make when choosing the right legal structure for your company. Your CPA should be consulted for advice.
Which type of legal structure is best for your company’s growth? To review your business plans, you can refer to them to determine which structure is most aligned with your goals. Your company should be open to growth and change, not hinder it from reaching its full potential.
A sole proprietorship is the best option for startup and operational complexity. It is easy to register your name, begin business, report profits and pay taxes. It can be hard to obtain outside funding. For partnerships, however, a signed agreement is required to set out the roles and share of the profits. There are different reporting requirements for corporations and LLCs with the state governments as well as the federal government.
Because a corporation is an entity, it has the lowest personal liability. Customers and creditors can sue the corporation but cannot access the personal assets or officers. An LLC provides the same protection but has the tax advantages of a sole proprietorship. As per their partnership agreements, partners share the responsibility.
The owner of an LLC is responsible for taxes as a sole proprietor. All profits are considered personal income, and are taxed accordingly at year’s end.
Expertly.com’s chief marketing expert Jennifer Friedman stated, “As a small-business owner, you want avoid double taxation in your early stages.” The LLC structure helps to avoid this and ensures you are not taxed both as a person and as a business.
Partnership partners can also claim their share as personal income. To minimize the impact on your return, your accountant might suggest biannual or quarterly advance payments.
Each year, a corporation files its tax returns, paying taxes on profits after expenses. You will be responsible for personal taxes if you receive money from the corporation. This includes Social Security and Medicare. Check out our reviews on the top payroll services. ]
A sole proprietorship or LLC may be best for you if you need to have primary or sole control over the business’ activities. This control can also be negotiated in a partnership agreement.
A corporation is designed to have a board that takes the most important decisions and guides it. Although a single person may be able to control a corporation at its inception and throughout its life, it becomes more important that it is managed by a board of directors as it grows. Even for small corporations, the same rules that apply to larger organizations such as taking notes on every decision that has an impact on the company are still applicable.
A corporation is a better option if you are looking for outside funding. It is easier to obtain outside funding for corporations than sole proprietorships.
Corporations can sell stock shares and obtain additional funding to grow, while sole proprietors cannot access funds through their personal accounts. They can only use their credit cards or take on partners. Although an LLC may face similar problems, the owner does not have to use their personal assets or credit.
Licenses, permits, and regulations
You may also need licenses or permits to operate your business, in addition to the legal registration of your entity. It depends on the type and activities of the business, licensing may be required at the local, state, and federal levels.
Friedman stated that different states have different requirements for different business structure types. “Depending on the location you are setting up, there may be different requirements at municipal level. When choosing your structure, consider the industry and state you are in. There is no ‘one size fits all’ solution and some businesses might not know what the options are.
These structures are only applicable to for-profit companies. Friedman recommends consulting a business lawyer if you are still not sure which structure is best for your business.