Explain the Legal Structure of a Business
Incorporation: Sole proprietorship is the easiest way to do business. The cost of setting up a sole proprietorship is very low and very few formalities are required. Incorporation: To form an LLC, you must pay a filing fee ($100 to $800) and have a by-law when the entity is formed. Company agreements are highly recommended, but not required by all states. Similar to a partnership agreement or a company`s bylaws, the LLC operating agreement establishes rules for the ownership and operation of businesses. A standard enterprise contract includes: Each new company must form a business entity by choosing a legal structure under which the company operates. Under the Uniform Partnerships Act (which most states have passed), a partnership is an “association of two or more persons acting as co-owners of a for-profit enterprise.” Often, you choose a partner because they have skills or expertise that you may be lacking. However, be especially careful when choosing a suitable partner. Don`t choose the first person to offer an investment in your business. A partnership is in many ways a marriage; However, few take the time and strive to choose a partner they would choose when choosing a spouse. Nevertheless, many companies had to close their doors because the union was not functioning. Similar to a sole proprietorship, but with multiple owners (a sole proprietorship cannot have more than one owner).
Like a sole proprietorship, a partnership is not a separate legal entity from its owners. Unlike other types of businesses, co-operatives are owned by the people they serve. Notable examples of co-operatives include: Because of this distinct status, the company itself pays taxes; Income is not reported to individual owners` tax returns. Owners would pay taxes like any other employee of a company: on the money they receive for salaries, bonuses and other benefits. One thing to keep in mind is the potential for double taxation. As an owner, you would pay taxes on the salary you receive from the business, but you would also pay corporate income taxes on the profits of the business. For example, many small business owners choose an LLC because it offers personal liability protection and is taxed as an intermediary unit. With a similar logic, it is important to note that many businesses will incur losses in the first few years and owners can gain significant tax benefits by having these losses carried forward to their personal tax return. The net effect will be less tax paid by the owner, which will give them more after-tax income. In many ways, this type of structure offers the benefits of a business and a partnership. Owners are protected from personal liability, as they would in a corporation, but an LLC follows the lighter structure of a partnership.
To form an LLC, you must file with your state, and some states also require an operating agreement similar to a partnership agreement. LLCs cannot sell shares, although you can transfer a percentage of ownership to outside investors. The structures discussed here apply only to for-profit businesses. If you`ve done some research and still aren`t sure which business structure is right for you, Friedman recommends consulting a business law specialist. Starting a business requires not only knowledge of your business, but also an understanding of local, state, and federal laws. Today, there are many reasons for small business owner-operators to examine the legal structure of their business. Changing laws and capital requirements are just two of the many factors why owner-operators need to carefully consider the legal structures that best meet their needs. This business builder provides you with the information you need to determine the best business structure for you. Bob Smith established his company as a structure with significant administrative costs.
Installation alone costs Bob several thousand dollars, and Bob periodically has to hire an accountant to fill out paperwork and forms for several government agencies. Overall, these administrative procedures take a lot of time and money. We`ve rounded up the most common types of business units and their notable features to help you choose the best legal form for your business. A limited partner only risks his investment, but in return must allow one or more general partners to control the company. Indeed, if the limited partner becomes involved in the affairs of the partnership, he may lose his protected status as a limited partner. The general partners of a limited partnership are fully liable for the debts of the partnership. Once your business grows to a certain level, it`s probably in your best interest to integrate it. There are many popular examples of businesses, including: You could lose everything you own in your business and personal assets. That means your car, home, personal bank account and more. Your business can suffer damage in several ways. For example, if you go bankrupt and still have unpaid bills, creditors will be after your personal assets. Additionally, if a driver accidentally kills a pedestrian for your business, your business can be held liable.
Depending on the structure of the business, your personal assets may also be at risk. Want to know the other steps to start a business? Read our blog post “11 Steps to Starting a Business in Tennessee or Alabama.” A corporation or corporation C is an independent entity for legal and tax purposes, separate from the persons who own or operate it. A company can raise money by selling shares, and a corporation will continue to exist indefinitely, even if one of the shareholders dies or sells their shares. Business owners are not personally responsible for the company`s financial obligations, nor are they personally liable for any dispute. There are 3 main types of business structures in the UK. These are sole proprietorships, partnerships and limited liability companies. This entity is owned by two or more persons. There are two types: a partnership, where everyone is divided equally; and a limited partnership, where a single partner has control of its operation, while the other person (or persons) contributes to the profits and receives a portion of them. Partnerships have a dual status of sole proprietorship or limited liability company (LLP), depending on the financing and liability structure of the company. If your business qualifies under IRS rules, you can choose to become a special class of companies known as S Corp. To be classified as an S company, you must still become a corporation by following the general procedure described above. Liability: A corporation is an “immortal” legal entity, meaning it does not end with the death of the shareholder.
The shareholders of the company have limited liability because they are not personally liable for the debts and obligations of the company. Shareholders cannot lose more money than the amount they have invested in the company. Like the provisions of an LLC, shareholders must be careful not to “penetrate the corporate veil.” Personal checking accounts should not be used for business purposes and the company name should always be used when interacting with customers.