What is Business Organizations Law?
Common types of business structures and what each option offers
on December 15, 2016
Updated on October 21, 2022
Starting a business is a significant accomplishment, one that involves a lot of structural decisions. Will you operate your business independently, or will you have a business partner or two? Do you want to incorporate? How much personal liability are you comfortable with? Each type of business structure has different requirements, offers different levels of protection, and brings different levels of liability.
The following overview will give you an overview of the different forms of business organization and what each option offers so you can evaluate what’s best for your situation.
Business Organizations Law – What You Need to Know
- Which business entity you choose for your business depends on your circumstances and goals.
- A partnership is a business that is owned and operated by two or more people who have agreed to share responsibilities and profits.
- A corporation is a legal entity that exists separately from the business owners, with the owners controlling the corporation through the shares they own.
- LLCs allow you to adopt the tax benefits of other business forms like partnerships without taking on the personal liability risks that come with operating a partnership.
An Overview of Business Organizations Law
Suppose you are considering starting a business, or you have created a business but are unsure how to register it. In that case, it may be helpful to review the common types of business organizations available to you.
A business owned and operated by one person is called a sole proprietorship. It is the simplest type of business, and they are straightforward to set up. These types of businesses don’t even require any formal action because they are formed automatically through business activities. While you don’t need to take any legal action to create the business, you still need to make sure you obtain the required permits and licenses to operate said business legally in your jurisdiction.
A partnership is a business owned and operated by two or more people who have agreed to share responsibilities and profits. The two most common types of partnerships are “general” and “limited liability.”
In a general partnership, partners share management responsibilities and profits. They also share responsibility for all the business’s debts and other financial obligations. This is likely the best route if all your partners want to be actively involved in the business.
Limited Liability Partnership
A limited liability partnership includes both general partners and limited partners. The general partners own and operate the business and assume its debts and liabilities. In contrast, limited partners have no control over the company and accept none of the liability—acting instead as investors. This type of partnership is usually used when many passive partners do not wish to be actively engaged in the management of the business. These are more administratively complex than general partnerships, so you may want to evaluate whether forming a limited partnership over a general one is necessary.
A corporation is a legal entity that exists separately from the business owners, with the owners controlling the corporation through the shares they own. The formation of a corporation is governed by state law, so you may find it helpful to review your state’s specific laws with an experienced lawyer. A corporation status gives the business benefits that are not available to other business forms but, again, these are based on state laws.
C corporation (c-corp)
The profits of corporations formed under subsection C of the Internal Revenue Code are taxed separately from owners’ taxes. Owners can split the corporate profit amongst themselves, resulting in tax savings. There can be unlimited shareholders in a C-corp, and foreign nationals can be owners and investors.
S corporation (s-corp)
These are corporations formed under subchapter S of the tax code. In contrast to a C-corporation, S-corps are closely held, which means you cannot have more than 100 shareholders. Additionally, there are limits on who can be shareholders or invest because it must be a domestic corporation. For a more in-depth discussion about S-corps, you can follow this link.
Limited Liability Company (LLC)
LLCs allow you to adopt the tax benefits of other business forms like partnerships without taking on the personal liability risks that come with operating a partnership. In other words, an LLC is a hybrid of a partnership and a corporation, combining many of the benefits both have to offer.
When you form an LLC, you will most likely be required to file articles of incorporation with your state. These will establish the rights, duties, and obligations of the members. The legal details of starting an LLC are controlled by state law, so who can be a member can vary across the country. Some states allow anyone to be a member, including foreign nationals and corporations.
Below are some common questions you might want to consider when meeting with an attorney for the first time.
- What type of business formation is best for me?
- Who can be a shareholder in my business?
- What type of business should I create for the best tax benefits?
- What are the pros and cons of forming a corporation?
- What are the pros and cons of a partnership?
Finding the Right Attorney for Your Needs
It is crucial to approach the right type of attorney—someone who can help you through your entire case. To do so, you can visit the Super Lawyers directory and use the search box to find a lawyer based on your legal issue or location.
To help you get started, you may want to consider looking for a lawyer who practices business organizations law.
Should I Talk to a Lawyer?
Each type of business carries pros and cons, and they will often vary by state. Speaking with an experienced lawyer can help you make the most informed decision that will bring you the structure and benefits you are looking for. Your lawyer can also walk you through getting the necessary licenses and tax ID numbers from your state.
A lawyer will further be able to anticipate potential problems with your business plan and advise you on how to approach them, as well as keep track of deadlines and file all the paperwork with the necessary courts and agencies—giving you one less thing to worry about.