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

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

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

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

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

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

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

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.