Choosing the Best Business Structure
Choosing the Best Business Structure
Lesson Goals:
• Learn the importance of a legal structure
• Discuss four basic forms of business structures
Choosing the Best Business Structure
Choosing the Legal Structure of Your Business
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Sole Proprietorship
Partnership
Limited Liability Company
Corporation
Choosing the Best Business Structure
Questions You Should Ask
• How easy is it to set up and operate?
• What are the tax advantages and
disadvantages?
• What are your potential legal liabilities?
• What happens to the business if you should die?
• How easy will it be to liquidate the business?
Choosing the Best Business Structure
Choice based on:
Less Commonly Considered Concerns
• Raising Money
• Regulations – Ongoing Operation
• Continuity
• Flexibility
• Record Keeping
Choosing the Best Business Structure
Sole Proprietorship
Definition
A sole proprietorship is a business owned and
operated by one person for profit.
Choosing the Best Business Structure
Sole Proprietorship
Characteristics
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Easiest form of business to set up and operate
Profits are taxed only once
Unlimited legal liabilities
Business ends with death of owner
Easy to liquidate
Choosing the Best Business Structure
Formation of Sole Proprietorship
Easiest Form of Business to Set Up and Operate
• No formal process.
• Obtain all necessary federal, state, and local
licenses and permits.
• Register Assumed Name Certificate (if
necessary).
• Obtain Employer Identification Number (if
necessary).
Choosing the Best Business Structure
Types of Partnerships
General
Partnerships
Limited
Partnership
Choosing the Best Business Structure
General Partnership
Definition
A partnership is any two or more individuals who
contribute money, labor, and skill to a business,
and who share in its profits, losses, and
management.
Choosing the Best Business Structure
Limited Partnership
Definition
A limited partnership has one or more partners
who have limited liability and no rights of
management.
Choosing the Best Business Structure
Partnerships
Characteristics
Legal liability
Easy to set up and
operate
Profits are taxed
once
Terminates upon death
or withdrawal of
partner, unless there is a
partnership agreement
to the contrary
• Unlimited for general
partners
• Limited for limited
partners
Easy to liquidate
Choosing the Best Business Structure
Formation of General Partnership
Easy to Set Up and Operate
• No formal process required.
• Obtain Employer Identification Number.
• Obtain all necessary federal, state, and local
licenses and permits.
• Register Assumed Name Certificate, if
necessary.
• Partnership Agreement (optional, but highly
recommended).
Choosing the Best Business Structure
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Formation of Limited Partnership
File Certificate of Limited Partnership with
Secretary of State or other appropriate agency.
Name must contain the words “Limited
Partnership.”
A written partnership agreement is required.
Maintain certain records as required by state
law.
Choosing the Best Business Structure
Limited Liability Company
Definition
• Created by state law
• Cross between a partnership and a
corporation, with mostly partnership
characteristics
• Tax advantages of a partnership
• Limited liability of a corporation
Choosing the Best Business Structure
Limited Liability Company
Characteristics
• Profits are taxed once
• Limited legal liability
• Business may or may not terminate upon death
or withdrawal of member, depending upon
operating agreement
• Moderately easy to liquidate
• Moderately easy to set up and operate. Some
formalities are required
Choosing the Best Business Structure
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Formation of LLC
Acquire all the necessary licenses and permits.
File articles of organization with the Secretary of
State.
Pay filing fees.
Prepare and adopt operating agreement.
File all necessary reports with the Secretary of
State.
Choosing the Best Business Structure
Corporation
Definition
Formed under state or
federal law. Legally
treated as an artificial
person, distinct from the
individuals who own it.
Choosing the Best Business Structure
Organization of Corporation
Corporate Structure
• Shareholders own the corporation through
stock ownership.
• Shareholders elect the Board of Directors
• Board sets corporate policy.
• Board elects corporate officers who run the dayto-day operation.
Choosing the Best Business Structure
Corporations
Types
C
Corporation
S
Corporation
Professional
Corporation
Choosing the Best Business Structure
Corporations
Characteristics
• The most complex form of business to set up
and operate
• Profits may be subject to double taxation
• Limited legal liability
• Business continues after death of owner(s)
• Difficult and expensive to liquidate
Choosing the Best Business Structure
Formation of Corporation
Most Complex Form of Business to Set Up and Operate
• File Articles of Incorporation with the
Secretary of State.
• Pay filing and license fees.
• Prepare and adopt bylaws.
• Obtain corporate minute book, corporate seal,
stock certificates, and other desired supplies.
• Follow corporate formalities.