52.Choose+the+appropriate+legal+structure+for+a+business

What is the appropriate legal structure for a business and how do you choose it?

Choosing a legal structure (also called a business ownership structure or business form) is one of the first things an entrepreneur does when starting a business. Choices include LLCs, partnerships, sole proprietorships, corporations, non-profits and co-operatives. This decision hinges on liability issues, tax obligations, investment needs and other factors; but the key is to find the best fit for your organization. The following resources will help you decide which legal structure is best for your business by examining the pros and cons of each, relevant investor issues and more.

When deciding to start a business, it is important to consider how you will choose to form your business from among the various types of business structures. What follows are a brief description of some of the business structures, including:

• Sole proprietorships

• Partnerships

• Limited partnerships

• Limited liability companies (LLC)

• Corporations

• Nonprofit corporations, and

• Co-operatives (Co-Ops)

Partnerships and Sole Proprietorships

Many small businesses start their existence being organized as a sole proprietorship, if owned by one person, or a partnership, if owned by multiple people.

Sole Proprietorships

A sole proprietorship is perhaps the simplest of all the different types of business structures. Unlike LLCs and corporations, there are no papers to file and no fees to pay in order to set up a sole proprietorship. You are the sole owner of your business, and you simply have to begin business operations in order to create a sole proprietorship.

In terms of the legal entities involved in a sole proprietorship, you and the sole proprietorship are the same thing. This means that you will pay taxes on any business profit as income on your personal taxes, and if your business has any liabilities (like a court judgment or a past due debt), you are personally liable for them.

Partnerships

A partnership is like a sole proprietorship in that it is simply a business that is owned by two or more people. Similarly to a sole proprietorship, the owners of a partnership do not need to file any papers or pay any fees to set up a partnership, the partnership simply begins when you start a business with one or more other people. Also like a sole proprietorship, each partner will report their share of the business profits on their personal taxes as income, and each partner is personally liable for any debts, claims or other liabilities that the business is responsible for.

These two types of business structures, sole proprietorships and partnerships, are great for simple businesses where issues regarding personal liability are not a big concern. For example, a small business that provides a simple service to customers would probably not have to go through the procedures surrounding a corporation or LLC in order to gain the limited liability that comes with those business structures because the potential personal liability is small.

Limited Partnerships

Unlike a partnership, a limited partnership costs money and can be very complicated to set up. Limited partnerships are not the best choice for a small business that has a small potential for personal liability. Limited partnerships are normally organized by one or more persons, the "general partners," that are responsible for getting others to join the partnership as "limited partners."

The general partners run the day to day operations of the limited partnership for the most part. The general partners are personally liable for any debts, judgments or other liabilities that the limited partnership has, except if the general partner is a corporation or a LLC. In addition, just like a partner in a normal partnership, the general partners in a limited partnership will share in the business profits and report this income on their personal income taxes. The limited partners are not personally liable for any of the limited partnerships liabilities, and are correspondingly not included in many of the day to day operations.

Most commonly in the United States, limited partnerships are found in the film industry or in real estate investment projects. In addition, some states allow a limited partnership to become a limited liability partnership (LLP). Under a LLP, general partners are no longer personally liable for the actions of the partnership or other general partners, and are only responsible for their own negligence or malpractice under the partnership.

LLCs and Corporations

Although creating and maintaining a corporation or an LLC will probably be more complex and costly than forming a sole proprietorship or partnership, it may be worth it for your small business depending upon the type of work you plan on doing. Perhaps the main reason you would want to organize your business as a LLC or corporation is to shield yourself from any personal liability that may arise from your small business' dealings.

Although LLCs and corporations are alike in many respects, what truly sets a corporation apart from the other types of business structures is that a corporation is its own legal and tax entity. A corporation pays its own taxes on any profits that it keeps and the owners of a corporation only pay income taxes on monies they draw from the corporation in the form of salaries, dividends and bonuses.

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