Business Formation

When forming a business, its legal structure is one of the owner’s most important practical decisions. Each type of structure has its own benefits and considerations that are affected by the business' size, the number of owners and employees, the industry, and other variables. Each state passes its own business formation laws, and not all states allow for every type of business structure. This means that the requirements for forming a particular type of business vary from state to state.

Sole Proprietorships

A sole proprietorship is the simplest kind of business. Most sole proprietorships are small businesses that have one employee — the owner. Forming a sole proprietorship is usually easy. In fact, in many states it requires no special action. Doing freelance or independent work under your own name is usually enough to form a sole proprietorship.

Two major benefits of structuring your business as a sole proprietorship are simplicity of formation and taxes. Since there usually are no formal steps required to form a sole proprietorship, there is no cost involved. Also, owners of sole proprietorships count the business’ income on their personal income tax returns. One drawback is that sole proprietorships do not offer any legal protection to their owners.

Partnerships

When two or more people start a business together, they can form a partnership. There are several types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships. In addition, joint ventures have some aspects of partnerships. The amount of money contributed, control exerted over the business, and legal liability vary depending on which type of partnership is formed.

To form a partnership, most states require partners to register the business with the secretary of state. It is also important for the partners to formalize their relationship in a partnership agreement, which is a contract that addresses the major aspects of the business, including how it will be run, how profits are split, and what to do in the case of dissolution.

Corporations

There are generally two types of corporations:  C corporations and S corporations. Larger businesses with multiple employees are often structured as C corporations, whereas many smaller businesses choose to organize as S corporations. The primary difference between an S and C corporation is how taxes are paid. C corporations are taxed as independent entities. The income of an S corporation “passes through” to the individual tax returns of its owners. An LLC may choose to treat itself as an S corporation for tax purposes.

Nonprofit Organizations

The basic definition of a nonprofit organization is a business that does not pass on excess revenue to owners, shareholders, or other investors. Instead, a nonprofit uses this money to further its mission, which includes paying the salary of its owners and other employees.

Many nonprofit organizations choose to incorporate to obtain federal and state tax exemptions, grants, and other benefits. One of the most common types of nonprofit organizations is a 501(c)(3), named after a section of the IRS code, but there are other types.

Franchises

Franchises are not a traditional business structure like the ones described above. A franchise is a business that licenses the name, logo, trade secrets, or other aspects of an existing business. For example, most fast food restaurants are franchises. In many cases, a person starting a franchise forms an LLC, partnership, or S corporation, and that company becomes the entity that pays the larger company for the right to use the name.

NewsFeed

BlogsFeed

  • Tokyo October 19, 2017 Imperial Palace and Nijubashi Bridge The D&O Diary is on assignment in Asia this week, with the first stop for meetings in Tokyo, Japan's capital city. Tokyo is such an amazing place. With a population of 13.8 million in the city itself and a…
  • Are distributions from a trust taxable? October 19, 2017 Maybe. It depends. Taxable to who or what? You see, this is one of those simple questions that often does not have a simple answer. Let's distinguish first between types of trusts, as this can make a big difference when it comes to answering the…
  • The California bar exam: time for some accountability from law school deans October 18, 2017 The California Supreme Court announced today that it will leave the California bar examination passing score at 1440 (144 on the national scale) for now. The Court said that "balancing all considerations, the court is not persuaded that the…
  • When a Good Relationship Turn Bad: Suing a Supplier October 18, 2017 No business is an island. Without trusted suppliers businesses would close shop. What happens when that trust is breached and you're left holding the bag? If disagreements can't be worked out and your company is facing or may face a serious loss as a…
  • Trademark Law: You Snooze You May Lose October 18, 2017 Whether you're starting a new business, launching a new product or service or just haven't gotten around to getting trademark protection for your logo, the names of your company or what you provide your customers, acting sooner is better than acting…