by U.S. Small Business Administration (SBA)
When organizing a new business, one of the most important decisions to be made is choosing the structure of a business. Factors influencing your decision about your business organization include:
* Legal restrictions
* Liabilities assumed
* Type of business operation
* Earnings distribution
* Capital needs
* Number of employees
* Tax advantages or disadvantages
* Length of business operation
The advantages and disadvantages of sole proprietorship, partnership and corporation are listed below.
Sole Proprietorship
This is the easiest and least costly way of starting a business. A sole proprietorship can be formed by finding a location and opening the door for business. There are likely to be fees to obtain business name registration, a fictitious name certificate and other necessary licenses. Attorney's fees for starting the business will be less than the other business forms because less preparation of documents is required and the owner has absolute authority over all business decisions.
Partnership
There are several types of partnerships. The two most common types are general and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended. Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating. A partnership agreement could be helpful in solving any disputes. However, partners are responsible for the other partner's business actions, as well as their own.
A Partnership Agreement should include the following:
* Type of business.
* Amount of equity invested by each partner.
* Division of profit or loss.
* Partners compensation.
* Distribution of assets on dissolution.
* Duration of partnership.
* Provisions for changes or dissolving the partnership.
* Dispute settlement clause.
* Restrictions of authority and expenditures.
* Settlement in case of death or incapacitation.
Corporation
A business may incorporate without an attorney, but legal advice is highly recommended. A "C" Corporation is a legal entity made up of persons who have received a charter legally recognizing the corporation as a separate entity having its own rights, privileges and liabilities, apart from those of the individuals forming the corporation. It is the most complex form of business organization and is comprised of three groups of people: shareholders, directors and officers. The corporation can own assets, borrow money and perform business functions without directly involving the owner(s) of the corporation. The corporation, therefore, is subject to more government regulation than proprietorships or partnerships. Corporate earnings are subject to "double taxation" when the corporation is taxed and when passed through as stockholder dividends. However, corporations have the advantage of limited liability, but not total protection from lawsuits.
Subchapter S Corporation -- A special section of the Internal Revenue Code permits a corporation to be taxed as a partnership or sole proprietorship, with the profits taxed at the individual rather than the corporate rate. To qualify as a Subchapter "S" corporation, a business must meet certain requirements. For more information, contact the IRS and request IRS publication 589.
"LLCs" and "LLPs" -- The Limited Liability Company (LLC) is rapidly becoming a very popular business form. An LLC combines selected corporate and partnership characteristics while still maintaining status as a legal entity distinct from its owners. As a separate entity, it can acquire assets, incur liabilities and conduct business. As the name implies, however, it provides limited liability for the owners. LLC owners risk only their investment. Personal assets are not at risk. The Limited Liability Partnership (LLP) is similar to the LLC with the exception that it is aimed at professional organizations.