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 ProprietorshipDefinition

A sole proprietorship is a business owned and operated by one person for profit.

Choosing the Best Business Structure

Sole ProprietorshipCharacteristics

• 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 ProprietorshipEasiest 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 PartnershipDefinition

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 PartnershipDefinition

A limited partnership has one or more partners who have limited liability and no rights of

management.

Choosing the Best Business Structure

PartnershipsCharacteristics

Choosing the Best Business Structure

Formation of General PartnershipEasy 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 CompanyDefinition

• 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 CompanyCharacteristics

• 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

CorporationDefinition

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 CorporationCorporate 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 day-

to-day operation.

Choosing the Best Business Structure

CorporationsTypes

Choosing the Best Business Structure

CorporationsCharacteristics

• 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 CorporationMost 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.

Choosing the Best Business Structure