Business Structure Types: How to Choose
The type of company ownership you choose will have an impact on how you organize and run your business. Before we discuss some of the key points regarding formation, we should review the different types of businesses available for a clearer understanding of the benefits of each to help you choose a business structure that’s best for you.
Make sure to check out and save US Legal Forms’s Small Business Package or Corporate Records Maintenance Package for additional resources for getting your new business entity organized and off on the right foot.
Sole proprietorships are considered the simplest business structure to set up. To define sole proprietorships, it’s possible to say that it is an individual doing business. To set one up, the individual must obtain the required local licenses for the industry in which they wish to work. If the individual is looking to use a name other than their own, they must officially register the name as a DBA (Doing Business As).
However, businesses owned by one person are subject to personal liability in relation to anything with their business; which means that this could be a risk for their personal assets should anything go awry.
Partnerships are similar to a Sole Proprietorship in that the partners are personally liable for the business’s activities. This means that if one of the partners does something unbecoming, the other partners may be held personally liable for their actions. As a result, partnership agreements are recommended to mitigate some risks.
A partnership agreement should note the circumstances that permit partnership termination, the terms of what happens should a partner withdraw, the responsibilities and duties of each partner, how long a partner may be inactive before they are removed, and their individual investments in the business at formation and recurring.
While a partnership is simply a shared sole proprietorship, it’s also a business. As a result they are public partnerships, that is to say, the records of this business are publicly available.
There are three primary partnership business structures: General, Limited, and Limited Liability. These types of firms vary in scope, though Limited Liability is often favored for its liability protections.
Limited Liability Company (LLC)
What is an LLC? A Limited Liability Company, the acronym LLC meaning, removes the personal liability but comes with some legal caveats in organizational structure. Out of all of the business types, this is one of the most common, and for good reason. There are a variety of different types of LLC that determine a number of factors relating to the business:
Typically taxed as a sole proprietorship, the single-member LLC adds personal liability protection to the entrepreneur. This type of company ownership can be treated as a corporation by the IRS, should the LLC elect to be viewed as such; otherwise, the LLC is viewed as a “disregarded entity” and the LLC’s taxes will be reflected on the owner’s personal federal tax return. There are other points of note when discussing a sole proprietorship vs LLC, however, the main selling point of a Single-Member LLC is the liability protection available to its owner.
Maintains two or more members with an operating agreement that defines their duties and responsibilities. The agreement also defines how membership is handled, procedures for the dissolution of the LLC, and the management structure of the organization. These LLC’s are typically taxed as partnerships, unless they choose a corporate tax structure.
Only does business in the state in which it is registered. These are typically formed to reduce the paperwork if the business’s activities will be limited to one state. In some states, this LLC may be required to file periodic reports and documentation on member changes.
Able to operate in more than one state, and must register as a foreign LLC in all states it will conduct business in, external to its home state.
Consists of sub-units which are individually shielded from the liabilities of other subunits formed under the Series LLC. However, if one subunit is indebted or liable to another subunit of the Series LLC, this is typically enforceable.
Other, rarer types, include:
Currently limited to Nevada; the articles of organization restrict business distributions until after 10 years from the businesses formation.
Currently limited to New Mexico; the ownership details are not publicly available.
A corporation is typically regulated to a much further degree than an LLC. Some of the formalities required are ensuring that the corporation operates as a separate entity than its owners, organization, and procedures. For example, the corporation may need to meet licensing requirements, register itself annually, hold board meetings, keep records of all actions and decisions discussed in board meetings, maintain records of corporate minutes, accounting ledgers, and shareholder records, and issue stock as per their security laws and articles of incorporation dictate.
While it may seem heavy handed, the shareholders, directors, and officers are not personally liable for most activities, unless the corporation fails to meet the legal requirements.
The corporate structures within the United States require a board of directors.
There are a number of types of businesses under the category of corporations, each of which has its own unique benefits and pitfalls.
Can have unlimited shareholders, including foreign nationals. These shareholders of this type of business are covered by liability protections. However, due to tax laws, the problem of double-taxation arises within this organizational structure, typically within large corporations. Taxes are taken from corporate profits and from distributed dividends on the shareholders’ end. This organization is owned by shareholders who elect the board of directors to maintain the corporation’s high-level policies.
Can only maintain up to 100 shareholders. The shareholders must not be another corporation, must be a citizen of the United States or “Resident Alien”. Taxation is handled differently, where the corporation is not taxed separately; instead the profits and losses are treated like those within a partnership and are reflected on shareholders’ personal tax returns.
Formed for scientific, literary, educational, charitable, or religious purposes, this type of entity is not designed for generating profits. A 501(c)3 is exempt from taxation but cannot distribute dividends; any assets maintained upon dissolution must be disbursed to another nonprofit; cannot be involved in political campaigns or significant lobbying. Nonprofit corporations also maintain some of the most strict legally required documentation protocols.
Typically operated by those rendering a service which requires their professionals to be licensed by the state, such as: Law Firms, Doctors, and Education Professionals. Shares may only be transferred to other licensed individuals in the same profession. The laws surrounding professional corporations can be extremely convoluted, ambiguous, and complex.
While there are many legal forms of business, the co-op is unique in the fact that it is owned and operated like a democracy amongst its members. Most often, a co-op is formed by consumers who wish to create a more positive place of business, in place of retail chains, unreasonably high prices, or quality concerns within a community
Forming your Own Business
As you can see, the legal structure of a business varies greatly depending on the type of business you’ve decided to create. There are many considerations to keep in mind when choosing. To give an example of how to register a business, we will discuss how to start an LLC. While this may not be completely accurate for your state, this is a general guide to help you understand the general process. It is recommended to speak with a business lawyer to ensure you are compliant with all local, state, and federal laws.
Creating a business is a big task, and while mulling over the details it is important to choose a name to represent your organization. Because of laws that are designed to protect businesses, you’ll need to have a name that’s unique and follows all state guidelines. You can search for existing business names for most states. You can also optionally register to reserve your business name, here is a resource from the U.S. Small Business Administration. Once you’ve decided on a name, and optionally reserved it, it’s time to choose the person who will receive all lawsuits, official documents, and subpoenas for the LLC; this person can be any state resident over the age of 18 in the majority of states. The term for this individual is the statutory or registered agent, which can also be a company that provides this service.
Now comes the paperwork. The first document to prepare is the Articles of Organization. This document is also known as the Certificate of Organization or the Certificate of Formation. The required information includes things such as: LLC name and address, LLC purpose, lifespan (permanent until dissolution, or specified), and the name and address of the statutory agent. The statutory agent must sign this document alongside the individual(s) filing for the formation of the LLC.
The next document you’ll need to utilize is the LLC Operating Agreement, whose requirements vary from state-to-state. In our example, we will use Florida as an example for a Single-Member LLC. The operating agreement is not required to be submitted by all states; however, it protects business owners, defines their responsibilities, minimizes potential future fallout, and ensures the owners’ rights are defined and protected. Additionally, while not always legally required, if one is not created, the state can decide the operating procedures of your business as per the state’s “default settings”, which may undermine your organization’s effectiveness.
Once the state has reviewed the filing and approved it, the LLC will be issued its documents and / or certificate that verify the LLC’s legal existence as an entity. After the documents are received, the next step is to acquire an EIN, the LLC’s tax number, then obtain a bank account for the LLC as well as the required licenses (if any) to do business in your specific industry.
If you decide to do business in other states, you will have to register in those states as a Foriegn LLC for each state you plan to do business in that is not the home state of the LLC.
After you’ve completed these steps, your LLC is operational and ready to do business.
Registering and preparing a business isn’t the hard part, maintaining and operating it is. Be sure that it’s the right decision for you, and we wish you godspeed! Good luck!