The Common Types of Business Formation

Every future business owner will have to decide what type of business structure they want to have. Once the entrepreneur has determined what type of product they wish to market, or what types of goods and services they wish to offer, they will then have to decide how they will go about structuring their business. Entrepreneurs are some of the hardest working people out there, they often times invest many man hours and even large amounts of their personal funds to start a new business. Because so much time and money goes into forming a business, it is essential that the entrepreneur fully understands the tax laws and how to take advantage of them.

When starting a business, the entrepreneur will have to choose how their organization will be structured so they can enjoy the greatest benefits. Entrepreneurs are faced with a variety of options including: a sole proprietorship, a limited liability corporation, or a corporation. Each option has its own advantages and disadvantages, and it is the job of the entrepreneur to learn each different structure and how each one works. This way they can choose the structure that will best suit their needs and they will be on their way to reaping the greatest rewards from their business. Although a certain type of legal structure may appear to be the best fit, it is always a sound business decision to consult with a business litigation lawyer before making an ultimate determination.

When an entrepreneur is deciding how they will form their business they will need to take several factors into account including: their ultimate goals for their business, how much control they wish to have, the tax implications of different ownership structures, their expected profit and/or loss of the business, if they are going to need to take cash out of the business, the potential vulnerability to lawsuits, and whether or not they will need to re-invest their earnings back into the business.

A large percentage of businesses start out as a sole proprietorship. In these types of businesses, the business is formed by one person who runs the daily activities of the business. Sole proprietors reap the rewards of any profits made by the business itself; however, at the same time they are also responsible for any liabilities or debts incurred by their business.

In a business partnership, two or more people share ownership over a business. Whenever someone ventures into a partnership, it is essential that they have legal agreements set in place that determine how the decisions will be made, how the profits will be distributed, how debts will be paid, how a partner can be bought out and how issues will be resolved.

With a corporation, the entity is separate from the owners. It can be taxed and it can be sued; however, the shareholders have a limited liability for the company’s debts. The owners are referred to as shareholders, and in general they are only held accountable for their investment in stock of the company.

A limited liability company is a popular form of incorporation for small business owners. The LLC is structured so that the business owner can benefit from the limited liability features of a corporation along with the tax benefits of a partnership. With an LLC, the business owner can choose between being taxed as a partnership or a corporation, and the owners have a limited liability for business debts even though they were in control or contributed to business decisions.

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