What is.... Legal Structure?
One of the most important parts of starting your business is understanding how you will pick the legal structure which fits best for you and your business. We will discuss five different options, to give more insight on which one may be a good fit. The information given should only be used as a reference guide, and not direct advisement.
Sole Proprietorships are one of the most common legal structures, this means the business is owned by one person or a married couple with no outside investors. This entity is the easiest to form, it can be done without even realizing it has been done. Providing any technical services to a local business without being on their payroll automatically establishes you as a sole proprietorship. The same rule applies if you were to sell any items online or at your local market.
There are a few options when going the partnership route, you could choose a limited partnership, general partnership, limited liability partnership or joint venture.
General partnerships consists of two or more people that operate a business together. All partners should be making contributions to the business equally and each person will be entitled to a share of its profits. Legally you don’t have to file any paperwork to establish a partnership, but failing to create a partnership agreement can have disastrous consequences for the business and the partners involved.
Limited partnerships have the same foundation as general, however limited partners are investors who give up most or all of their control over the business in return for limited liability.
Limited liability partnerships have the same concept as general partnership except all partners have limited liability. This entity is formed by filling a certificate of partnership with the secretary of state. This type of partnership is not recognized in all states, and some states place restrictions on professional groups like lawyers or accountants.
Joint ventures are simply short term general partnerships formed for a limited purpose. This structure is chosen when a business is wanting exposure to new markets or to gain access to new skills , technology. or intellectual property. There is not a special form that needs to be submitted when choosing this route, however you may want to legally formalize your agreement with a joint venture agreement.
Corporation is an additional legal structure that is more common for larger companies, but is also a viable option for small businesses. If the corporation is ran legally, then this would be a great option for growing small businesses. The “corporate shield” limits personal liability for debts, but this is only if all things are structured properly and ran legally.
C corporations under United States federal income tax law, refers to any corporation that is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately. Most major companies (and many smaller companies) are treated as C corporations for U.S. federal income tax purposes.
An S corporation, for United States federal income tax, is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.
LLC. (Limited Liability Companies) combines the best advantages of partnerships and S corporations, usually its taxed like a sole proprietorship or partnership, but liability is limited like a corporation. And just like a corporation, the “shield” can be pierced if the law is not followed. An example of not following the law would be not keeping your business and personal assets separate.
Cooperatives usually give equal control like a partnership but with the legal structure of a corporation. They don’t offer the tax benefits of a corporation, but they do pass profit and losses through to members (who are typically employees). Profits are distributed to members according to their economic interest in the cooperative.