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Choosing the proper legal organizational structure is one of the most important decisions to be made. The following are the basic forms of business ownership.
Sole Proprietorship
The individual owner of an unincorporated business operates the business as an extension of himself. The profits and losses of the business are reported on the tax return of the owner - there is no separate business filing. The owner is personally responsible for any liabilities of the business. If someone sues the business for breach of contract, personal injury, or to collect a debt, the court can directly levy the personal bank account and other property of the owner. The major advantage of sole proprietorship is that it is the simplest and least expensive structure, as there is really nothing to set up and maintain.
Partnership
Two or more people own the business jointly and share profits and losses of the business as spelled out in the partnership agreement. Each partner is potentially responsible for the full amount of all liabilities of the business, i.e., a creditor can collect the full amount of a debt of the partnership from the partner that is the easiest to collect from. Distribution of profits and losses is determined by the partnership agreement and passes through to the individual partners. It does not have to match the ownership percentages. The partnership itself is not subject to any income or franchise tax. Control of the business is determined by the partnership agreement, but unless stated otherwise, the partners control the business jointly, with each partner having an equal vote. An advantage of partnerships is that, like a sole proprietorship, no state filings are required to create the business entity, nor are there any ongoing reporting requirements.
- Limited Partnership
The basic structure and tax implications are the same as for a general partnership, but the limited partnership allows for one or more limited partners, or "silent partners", to own a portion of the business, but not participate in the management of the business. The partnership must also have a general partner who has personal liability for all liabilities of the partnership. This structure allows a partnership to have outside investors without subjecting them to the liabilities of the business.
Corporation ("C Corporation")
A corporation is owned by one or more stockholders, managed by a board of directors elected by the stockholders, and run day-to-day by officers appointed by the board of directors. A single individual can be the sole stockholder, director and officer of the company. The stockholders, directors and officers of the company are protected from the liabilities of the company, including liabilities for their own negligence when acting in their corporate role, except in certain extraordinary circumstances.
Limited Liability Company (LLC).
An LLC is a hybrid of a corporation and a partnership and is rapidly becoming the most popular structure for small businesses due to its flexibility and its low cost to create and maintain, while still offering most of the advantages of a corporation. The ownership percentages, profit and loss distributions, and voting powers of each member are determined by the LLC Articles of Organization, rather than by stock ownership. An LLC can choose to be taxed like a partnership or S Corporation with profits and losses flowing through to the owners’ tax returns, or taxed like a C Corporation, filing its own return. The owners and any officers and directors are protected from the liabilities of the company, as in a corporation. An LLC is generally subject to franchise tax, though this varies from state to state.
Conglomerate:
Conglomerate, in business, a corporation formed by the acquisition by one firm of several others, each of which is engaged in an activity that generally differs from that of the original. The management of such a corporation may wish to diversify its field of operations for a number of reasons: making additional use of existing plant facilities, improving its marketing position with a broader range of products, or decreasing the inherent risk in depending on the demand for a single product. There may also be financial advantages to be gained from the reorganization of other companies.
A cooperative (also co-operative or co-op) is an autonomous association of persons who voluntarily cooperate for their mutual social, economic, and cultural benefit. [1] Cooperatives include non-profit community organizations and businesses that are owned and managed by the people who use its services (a consumer cooperative) and/or by the people who work there (a worker cooperative).
Franchising is a business model in which many different owners share a single brand name. A parent company allows entrepreneurs to use the company's strategies and trademarks; in exchange, the franchisee pays an initial fee and royalties based on revenues. The parent company also provides the franchisee with support, including advertising and training, as part of the franchising agreement. To invest in a franchise, the franchisee must first pay an initial fee for the rights to the business, training, and the equipment required by that particular franchise. Thereafter, the franchisee will generally pay the franchise business owner an ongoing royalty payment, either on a monthly or quarterly basis. This payment is usually calculated as a percentage of the franchise operation’s gross sales.
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