The 4 Major Business Organization
Forms
Business organization is the single-most important choice you’ll make
regarding your company. What form your business adopts will affect a
multitude of factors, many of which will decide your company’s future.
Aligning your goals to your business organization type is an important step,
so understanding the pros and cons of each type is crucial.
Your company’s form will affect:
How you are taxed
Your legal liability
Costs of formation
Operational costs
There are 4 main types of business organization: sole proprietorship,
partnership, corporation, and Limited Liability Company, or LLC. Below, we
give an explanation of each of these and how they are used in the scope
of business law.
Sole Proprietorship
The simplest and most common form of business ownership, sole
proprietorship is a business owned and run by someone for their own
benefit. The business’ existence is entirely dependent on the owner’s
decisions, so when the owner dies, so does the business.
Advantages of sole proprietorship:
All profits are subject to the owner
There is very little regulation for proprietorships
Owners have total flexibility when running the business
Very few requirements for starting—often only a business license
Disadvantages:
Owner is 100% liable for business debts
Equity is limited to the owner’s personal resources
Ownership of proprietorship is difficult to transfer
No distinction between personal and business income
Partnership
These come in two types: general and limited. In general partnerships, both
owners invest their money, property, labor, etc. to the business and are
both 100% liable for business debts. In other words, even if you invest a
little into a general partnership, you are still potentially responsible for all its
debt. General partnerships do not require a formal agreement—
partnerships can be verbal or even implied between the two business
owners.
Limited partnerships require a formal agreement between the partners.
They must also file a certificate of partnership with the state. Limited
partnerships allow partners to limit their own liability for business debts
according to their portion of ownership or investment.
Advantages of partnerships:
Shared resources provides more capital for the business
Each partner shares the total profits of the company
Similar flexibility and simple design of a proprietorship
Inexpensive to establish a business partnership, formal or informal
Disadvantages:
Each partner is 100% responsible for debts and losses
Selling the business is difficult—requires finding new partner
Partnership ends when any partner decides to end it
Corporation
Corporations are, for tax purposes, separate entities and are considered a
legal person. This means, among other things, that the profits generated by
a corporation are taxed as the “personal income” of the company. Then,
any income distributed to the shareholders as dividends or profits are taxed
again as the personal income of the owners.
Advantages of a corporation:
Limits liability of the owner to debts or losses
Profits and losses belong to the corporation
Can be transferred to new owners fairly easily
Personal assets cannot be seized to pay for business debts
Disadvantages:
Corporate operations are costly
Establishing a corporation is costly
Start a corporate business requires complex paperwork
With some exceptions, corporate income is taxed twice
Advantages of an LLC:
Limits liability to the company owners for debts or losses
The profits of the LLC are shared by the owners without double-
taxation
Disadvantages:
Ownership is limited by certain state laws
Agreements must be comprehensive and complex
Beginning an LLC has high costs due to legal and filing fees
If you need assistance with any aspect of your firm's business organization
needs, reach out to our firm for the legal assistance you need. We can help
clients clarify their business choices, so call now!
