Unincorporated Business Structures
A Sole Proprietorship describes any type of business owned by one individual, and is among the most basic of business structures. The Sole Proprietorship can be any size, from a simple corner market, to a large warehouse. Their inherent simplicity makes them the easiest business to get off the ground, but this simplicity of structure also leaves the owner of the sole proprietorship vulnerable to direct liability. Even with a separate name (as is the case with a “DBA” or “doing business as”), because there is no “separate legal entity” status for the business, the owner is completely responsible for its debt and tax liability, and this means that all of his business and personal assets would be in jeopardy in the event of a financial, tax, or legal liability or litigation that resulted in an unfavorable outcome. This loss can arise from a business or a personal dispute.
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A Partnership describes any business or enterprising venture where there is more than one owner involved. The partners in a partnership can be individuals, corporations, or trusts, and the ownership is shared among the partners; this includes all income as well as all debt and liability. While a partnership can facilitate the launching of a business or venture because assets are pooled in the interest of the business, the downside of a partnership has many hidden dangers. Chief among these dangers is that of unlimited, direct liability for all of the partners. Because they are direct owners of the business, the partners are also directly liable for any debts incurred, any losses experienced, or any tax or financial liabilities that arise from the operation of the partnership. Further, the partners face risk even from themselves, with the ability of any of the partners to engage the business in financial obligations that may not be beneficial to the business, or that result in financial or tax liability. And the liability is not limited to financial commitments: the rest of the partnership can be liable for any actions committed by another partner, leaving them exposed to lawsuits. Finally, although there can be some tax advantages in a partnership over a sole proprietorship, they are not as significant as they can be with a properly organized, incorporated business. More Partnership Information
Incorporated Business Structures
A Joint Venture is a legal entity formed between two or more parties
to undertake economic activity together. The parties agree to create a
new entity by both contributing equity, and they then share in the
revenues, expenses, and control of the enterprise. The venture can be
for one specific project only, or a continuing business relationship
such as the Sony Ericsson joint venture. This is in contrast to a
strategic alliance, which involves no equity stake by the participants,
and is a much less rigid arrangement. More Joint Venture Information
A limited partnership (LP) is comprised of one or more general partners and one or more limited partners in order to form a separate, legal entity. Very much like a General Partnership, save for the separate, limited status of the limited partners. The driving concern is usually protection from liability and the ability to distribute funds among many shareholders (in the form of dividends) that would otherwise not be possible under a standard corporation. The general partners are responsible for the daily operations of the company, and are personally liable for its obligations and debts. To absorb the liability, a corporation or a limited liability company is most often used in the general partner position of a Limited Partnership. The limited partners invest capital in the company and share in the profits, but take no part in the daily operation of the business. Their liability, should the company be sued, is limited in proportion to the amount of capital that they invest.
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Limited Liability Company
A limited liability company, or “LLC” is a business organization structure that allows for certain favorable tax treatments, as well as personal liability protection, for the “members” involved. It is important to note that the specific structure and status can vary from state to state so complete consideration of the state’s laws in which the LLC will be formed is crucial.
An LLC as a business structure model allows for multiple owners, or “Members,” and a “Managing Member,” to enjoy limited liability. The Managing Member is typically the figure head of the organization and is responsible for it’s management. The profits or losses of the business organization pass directly through to the member’s personal income tax returns.
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A traditional Corporation (or “C” Corporation) is an incorporated business structure that creates a new, separate, legal entity that is distinct from its owner(s). As a separate, legal entity, a C Corporation can engage in business, have its own bank accounts, enter into legal commitments, establish its own credit identity, and even acquire property and assets. One of the chief advantages of being a separate entity is that the owners of the Corporation, known as “Shareholders,” enjoy limited liability protection. This means that their personal assets are shielded from any liability incurred by the corporation, and that they are not personally liable for any legal liabilities resulting from any litigation against the corporation. The extent of their losses is limited to the amount of their investment in the corporation. This type of asset protection and limited liability can be extremely advantageous to the sole proprietor who may be seeking to lure potential investors, and who may be seeking to mitigate his own personal risk. In addition, there are tax and fringe benefits enticements that make a Corporation an ideal business formation for the business person looking to take the next step in asset protection and limited liability. There are other things to consider when forming a Corporation, such as adherence to the rules, otherwise known as the Corporate Formalities, among other regulatory details. Please click on the link for more information.
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An S Corporation is an incorporated business structure that is formed in such a way as to comply with sub-chapter S of the Internal Revenue Code. Limited to 100 shareholders in most states, the S Corporation provides for the limited liability of a standard Corporation, and couples it with the pass-through taxation of a partnership. This means that the shareholders avoid the pitfalls of double-taxation, where income is first taxed a the company level, then again at the individual level, while at the same time providing for the limited liability protection of a Corporation. An existing Corporation can apply for S status before two months and 16 days after the end of it’s fiscal year. There are other eligibility requirements that must be met, so please follow the link for a more comprehensive explanation.
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A Professional Corporation is an incorporated business structure formed by individuals or groups of individuals that would other wise be exclude from corporate formation eligibility. These professionals include doctors, lawyers, accountants, engineers, etc., thought the list will vary in small detail state by state. The group must be organized with the intent of providing professional services, and must consist of professionals licensed to practice their particular profession. Professional Corporations provide for many of the same liability shields and tax benefits that traditional Corporations do.
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A Nonprofit Corporation is an incorporated entity designed to perform activities and enter transactions without the traditional intent of generating profits. A Non-Profit Corporation provides for many of the same shields from liabilities to its shareholders that a traditional Corporation provides. Contrary to its title, a Non-Profit Corporation can in fact generate profits, but that must not be its primary intent, and all profits must be used in furtherance of the non-business goals of the Non-Profit Corporation. There are no capital distributions or dividends paid to shareholders in a Non-Profit Corporation.
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Last Updated on March 25, 2018