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November 25, 2008

Which Legal Structure is Right For You?

Choosing a business organization is one of the most important decisions you will make when starting your own company. It is, therefore, imperative that you understand the rules and regulations that are exclusive to each specific entity. It is also important that you clearly define every aspect of your business. By doing this you ensure that you will pick the correct business organization for your company.

There are four main types of business organizations:
• Sole Proprietorships
• Partnerships
• Corporations
• Limited Liability Companies (LLC)

Each one of these options is unique and each caters to a specific type of business. The following is some information that will help you choose the right organization for you and your company.

Sole Proprietorship

The sole proprietorship is the oldest and most frequently used type of business organization. It is a relatively simple business structure that is owned by one individual. In a sole proprietorship the owner and the business are considered to be one and the same. The owner has complete control over every area of the business and is liable for all of its financial and legal transactions.

Partnership

A partnership is a business organization that is owned and operated by two or more individuals. Each individual contributes to the business in some way and each shares the responsibilities of the business. Creating a partnership is fairly easy to do, due in some part to the fact that there are not very many legal requirements involved. Partnerships are popular because the partnership does not pay taxes. Rather, the individual partners are taxed on the income that they receive from the business.

Corporation

A corporation is the most intricate form of business structure. It is considered to be a separate entity from the people who control and manage it. Corporations are owned by stockholders who may choose, at any time, to relinquish any or all of their ownership by selling their stock. The liability of the stockholders and company officials is limited to their personal investments in the company’s stock.

Limited Liability Company (LLC)

The limited liability company (LLC) is a fairly recent form of business organizations. Generally speaking, a LLC is a combination of a partnership and a corporation. In a limited liability company the owner or owners are not liable for the obligations of the company. Also, the company, as an entity, is not taxed. The proceeds and costs of the business go directly to the partners, which enables it to avoid double taxation.

These are just the four main types of legal structures.  There are others available.  MetroAction recommends that you consult with you attorney and/or accountant before choosing a legal structure.  Every business and every business organization is unique. By defining exactly what type of business you want, the easier it will be for you and your advisors to select the perfect type of organization.

For more information on the four main business organizations, visit www.irs.gov.