Sole Proprietorship

The title speaks for itself. The individual operates alone and is personally liable for all debts and acts arising out of the operation of the business. This structure only makes sense for small, INDIVIDUAL, or temporary business ventures because their may be some tax benefits operating under this structure. Again, this business structure is not an option if there is more than one person running the business organization.

Partnerships

If you are going into a business venture with someone else, by the very nature of the business relationship, you have created a partnership. The two most common types of partnerships are general and limited partnerships. Each one of these partnerships has its own advantages and drawbacks. However, with the general partnership, each partner opens himself up to personal liability to the debts and acts of the partnership. This is probably the major drawback of a general partnership.

In contrast, in a limited partnership, the individuals that are limited partners are only liable up to the amount of their investment. Limited partners cannot have any actual or apparent control of the day to day operations of the partnership.

The bottom line is that, like a sole proprietorship, the partners generally are liable for the debts and personal acts of the partnership which can be a very unattractive option for some business people.

Limited Liability Companies

The limited liability company, or “LLC”, is a relatively new business structure and is governed by the laws of the state where the LLC is created. In most states, organizing a LLC is very simple and usually includes just filling out a one page standardized form and paying a filing fee. Probably the most appealing aspects of an LLC are the fact that members are not held personally liable for the debts and acts of the LLC and that the LLC enjoys pass through taxation status. Specifically, the member will only be taxed once on distributions and earnings. Further, the administrative aspects of a LLC are much less cumbersome than that of a corporation.

Corporations

The final option for individuals that go into business can organize as a corporation. The corporate structure is often chosen because it is a legal entity that is separate and apart from its owners and managers. As a distinct legal entity, a corporation can sue and be sued, own property and convey property in its own name, and issue stock to shareholders. In addition, corporations offer owners (shareholders) and managers (directors and officers) personal liability protection when it comes to the debts and acts of the corporation. The administrative requirements for a corporation include filing articles of incorporation and bylaws with the state you are incorporating in. Further, corporations can exist in perpetuity, has centralized management (board of directors), and has increased freedom in transfer of ownership with the buying and selling of stock in the corporation. In most states, corporations are required to hold an annual shareholder and directors meeting to fulfill the states reporting requirements.

Summary

The bottom line in a business organization situation is what makes administrative, financial and legal sense. Each business structure has its own benefits and drawbacks and that is where sound legal and tax advice is crucial before embarking into any business venture.

(Note: The above should not be taken as legal or tax advice. It is offered as an overview of basic business structures and organizations)

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