What are the differences in organizational structure and what legal structure should I choose?
Once you decide to establish a business, your first consideration will be the type of business organization to use. Your selection of a business structure is based on a number of factors. These may include:
• Record keeping
• Future activities
You should carefully analyze the advantages and disadvantages of each type of structure, keeping in mind your particular business and personal needs. There are three principal kinds of business structures: the Sole Proprietorship, the Partnership and the Corporation. There are advantages and disadvantages to each legal form of business. A brief description of each type is provided below however we recommend that you go to the legal structures section for further information. It may be advantageous to seek professional advice from an attorney and/or tax specialist.
A sole proprietorship is probably the simplest business structure to organize. Because of this, most new businesses are started as sole proprietorships. A sole proprietorship business is owned by one individual (not a married couple) who has complete control of the business. Revenues are considered personal income and are taxed at the owner's personal tax rate.
If a sole proprietorship is using a name other than the individual's true name (the name on your social security card) a "Certificate of Assumed Business Name" must be filed with the Secretary of State's office.
A partnership involves two or more people conducting a business together. This business structure is also fairly simple to organize, but may be more costly than a sole proprietorship because it requires a separate tax return for each partner.
It is strongly recommended that a written partnership agreement, prepared with an attorney's assistance, be drawn up between the partners. Partners share in the profits and losses of the business according to the agreement, although profits are taxed as personal income. While a partnership is recognized as a separate legal entity from the individuals who are partners, their personal assets can still be used to satisfy the business' creditors.
General partnerships must file a "Certificate of Assumed Business Name" with the Secretary of State's office, if they do not operate under the full names of each partner.
A Limited Liability Partnership (LLP) is a fairly new type of partnership. In this type of partnership, the liability of each partner can be limited to exclude obligations resulting from professional mistakes made by other partners or malpractice actions against other partners. The partners do, however, continue to share liabilities resulting from all other activities of the partnership. Individuals or an existing general partnership may elect to become an LLP by filing an application for registration with the Secretary of State's office.
A Limited Partnership is made up of two or more individuals who jointly own a business. This form of business allows for general partners and limited partners. Limited partners are generally financially liable for debts only to the extent of their investment. They have limited or no control over management of the company. The general partners manage the company and have the greatest potential risk/reward from the operations of the business.
A corporation can be complex and expensive to organize. Legal assistance in setting up a corporation is strongly advised. The corporation is recognized as a completely separate legal entity from the owners. Because a corporation is a separate legal entity, the owners can implement pension, profit sharing, and other benefit programs as incentives for employees. There are several different types of corporations including C Corporation, S Corporation and Non-Profit Corporation. Depending on the form of incorporation, profits may be taxed twice - once to the corporation and once to the owners as income. Originals of a corporation's Articles of Incorporation must be filed with the Secretary of State's office.
A Limited Liability Company (LLC) can provide the liability protection of a corporation and the federal tax benefits of a partnership. It is formed in a similar manner as a corporation, although directors are called managers and shareholders are called members. The name of the company must include the words "Limited," "LLC" or "Ltd." In a LLC the individual members or managers are not personally liable for debts, obligations, or liabilities of the company. Articles of Organization must be filed with the Secretary of State's office.