Legal Forms of Business Structures: A Complete Overview
Entrepreneurs are often buzzing with exceptional (and sometimes crazy) ideas. But when it comes time to turn them into reality, they’ve got to make a decision. They must choose one of the legal forms of business structures to translate those ideas into a thriving business.
Are you planning to start a business? Well, you are not alone. Self-employment is exploding in the US according to the United States Census Bureau reports (see chart below).
The journey from a great idea to a thriving business is a long and challenging one. From obtaining a startup loan to building a good product to marketing your small business and offering personalized customer service, you have much to take care of. Deciding on the type of business structure you want is of utmost importance.
In this post, I will get you acquainted with the four legal forms of business structures, along with their advantages and drawbacks.
Let’s dig in.
An Overview of the Four Legal Forms of Business Structures
The business structure you choose bears an impact on several factors, including raising funds, registration and operational matters, taxes, and even risk management. Knowing when to contact a business lawyer can save you from costly missteps.To establish a healthy business organization structure, you need to choose the right entity.
So without further ado, here is a quick overview of the major legal forms of business structures:
1. Sole Proprietorship
Sole Proprietorship or sole props is the easiest business structure to form. The owner is in full control of the business. That individual will be responsible for all of the day-to-day business operations from sourcing the raw materials to sales and distribution. To ease their responsibilities to some extent, they can rely on a contact management tool to better manage their contacts.
The business is not considered a separate legal entity from its owner and neither is it registered as a business entity. All you need are the relevant permits. When you want to set up a business on a small scale, a sole proprietorship is a great option.
Since you are in charge of the entire business, you can run it and expand it at your own pace. A sole proprietorship is best suited for low-risk businesses where the owner personally handles the production and sales leads of his or her products.
From a tax perspective, a sole proprietorship does not pay corporate taxes. The owner is required to file Form 1040 and include Schedule C and SE while paying self-employment tax.
One of the major drawbacks of a sole proprietorship is that the personal assets and liabilities of the owner are not considered separate from that of the business. For that reason, the owner’s personal assets may be consumed in the case of debt or loss. This might even include shared assets if one is married.
2. Partnership
A partnership is very similar to a sole proprietorship in its structure, liabilities, and tax payments. As the name denotes, this business structure is run by two or more owners. These owners or partners jointly share all the business liabilities, profit, and tax payments. This is one of the simplest legal forms of business structures that’s suitable for two or more people to form a partnership and start a new business.
And to reduce operational costs and work more efficiently, you may want to invest in a virtual phone solution to connect with your clients and customers.
There are three major types of partnerships:
- General Partnership: When forming this kind of structure, partners join hands to create a business. Each partner will participate in all the decisions and operations of the business, and thus is completely liable. They are responsible for not only their actions but for the other partner’s, too.
- Limited Partnership: In this kind of business structure, there are one or more general partners who are fully responsible for the operations of the business. Additionally, there are limited partners whose liabilities are limited to finances. They are neither the decision-makers nor do they have control over the business entity.
- Limited Liability Partnership (LLP): An LLP is the enhanced version of the general partnership in which the partners participate in all the operations of the business. However, in an LLP, one partner is not held responsible for the decisions of other partners or for the loss the business may run into.
3. Limited Liability Company (LLC)
If you are looking for legal forms of business structures with limited liabilities, LLC is the best choice. It brings you the flexibility of a sole proprietorship and the protection of a corporation.
One of the biggest advantages of an LLC is that the personal assets of the business owners are fully protected. As one of the more flexible legal forms of business structures, LLC owners may choose to pay personal taxes or corporate taxes. Small business owners, startups, and freelancers prefer this business structure for the multifaceted benefits and protection it offers.
Consider taking advantage of the free LLC formation packages provided by services like Inc Authority, as this GovDocFiling review explains, to get started. You’ll only need to pay state fees!
4. Corporation
A corporation is one of the most complicated legal forms of business structure. This business entity is formed by shareholders and exists independently of its owners. It is the board of directors and the employees who are responsible for the operations of a corporation. When compared to all the three legal forms of business structures mentioned above, a corporation involves more paperwork, has a complex structure and regulations, and pays more taxes.
Here are the three main types of corporations:
- C Corporations: These are independent and the most complex legal entities. There is no limit on the number of shareholders. Such big organizations often use a variety of tools to simplify their operations like CRMs, e-signature tools, analytics and research tools, lead generation solutions and so on. However, a C corporation is subjected to double taxation which is its major drawback.
- S Corporations: An S corporation is similar to a C corporation in every way, except that it cannot have more than 100 shareholders. Also, S corporations are not subjected to corporate taxations.
- Non-Profit Corporation: This type of business structure is best suited for charitable organizations. They enjoy tax exemptions provided their entire income is spent on the various projects that the company undertakes.
Which of These Legal Forms of Business Structures is Apt for Your Business?
Now that you have a clear idea about the legal forms of business structure in the US, it’s time to choose the ideal one for you. Then you’ll be ready to build a strong team, develop your product, and choose the right website design for your small business. Once your business is set up, you can design affiliate marketing programs to boost sales and expand your reach.
It’s a long journey, but it’s worth the effort.
So now, the time has come: find the most appropriate business structure for you and establish your business!
Author Bio – Reena Aggarwal
Reena is Director of Operations and Sales at Attrock, a result-driven digital marketing company. With 10+ years of sales and operations experience in the field of e-commerce and digital marketing, she is quite an industry expert. She is a people person and considers the human resources as the most valuable asset of a company. In her free time, you would find her spending quality time with her brilliant, almost teenage daughter and watching her grow in this digital, fast-paced era.