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

  • When IPO Companies Stumble Out of the Blocks August 20, 2017 Most informed observers know that IPO companies are more susceptible to securities class action litigation than are more seasoned companies. IPO companies usually have short operating histories and so their post-offering performance can be…
  • Selecting a Registered Agent for Your Texas Business August 20, 2017 What is a registered agent?You've taken the first steps towards starting your new business by selecting a business entity, but now you need to choose a registered agent for your business. Naming a registered agent may seem like a formality, but it…
  • What Are The Pros And Cons Of Venture Capital Financing? August 18, 2017 Venture capital (VC) is a form of financing that is provided to early-stage companies that have been deemed to have high-growth potential by venture capital firms or funds. Typically, venture capital financing is attractive to smaller, newer…
  • Some things to Consider Before Signing a Commercial Lease August 18, 2017 Startup owners may become overwhelmed in their search for commercial office space. Most often, entrepreneurs will need to lease office space because they neither own nor have the finances for purchasing the space they require. As a result, many…
  • Lawsuit Over Control of Uber Turns on What the Parties Knew and When They Knew It August 18, 2017 Paris, France, December 10, 2013. LeWeb Day 1. Image by Dan Taylor/Heisenberg Media Ride sharing behemoth Uber is keeping plenty of lawyers busy. The latest lawsuit concerns control over its board of directors and whether its founder and former CEO,…