Are you considering starting a business? Have you decided on a business structure? This will be one of the first decisions you will need to make. It’s certainly among the least exciting, least creative decisions you will make as you dive into the world of entrepreneurship, but it’s an important step. Here’s a brief rundown of the different types of business entities or business structures that exist. It’s highly suggested that you make this decision after seeking counsel from an attorney though. There’s a lot to consider and you can save yourself time and money in the long run by choosing the business structure that will best suit your needs and goals.
Types of Business Structures
A corporation exists separately from you. It exists separately from the owners, managers and controllers completely. It’s actually an independent legal entity. When you eventually pass away, it doesn’t dissolve. It’s literally considered a separate entity. You might have heard that corporations are virtually legally classified as a separate “person.”
Corporations can enter into contracts, do business, and pay taxes, separate from all owners and shareholders. Owners have limited liability. You will absolutely need to consult with a lawyer if you want to form a corporation.
Limited Liability Company
A limited liability company (LLC) is kind of like a corporation in that the owners have limited liability. It’s a little more simple though. Corporations are required to hold regular stockholder/management meetings. They also have other formalities. LLCs are not required to participate in these formalities.
Most advisors suggest that you consult with a lawyer even to form an LLC as well. From what we’ve witnessed from dealings in our commercial real estate firm, we also suggest taking the time and shelling out the expense to meet with a lawyer before forming an LLC.
When two or more persons co-own a business and share the business’s profits and losses, the business structure is called a partnership. To form a partnership, each co-owner contributes something. Sometimes, one partner supplies the funding and another partner supplies the skills. Sometimes, both partners fund the business. Sometimes, one partner will supply the real estate while another supplies the capital investment.
In a general partnership, each partner is allowed to act on behalf of all other partners and each partner is also responsible for the business’s obligations and debts.
With a limited partnership, partners determine each individual’s personal liability. With limited partnerships, partners aren’t responsible for the partnership’s debts. Limited partners don’t have the right to manage the business, whereas general partners do.
In a sole proprietorship, you are the only owner of the business. There’s no real distinction between you or the business legally. If you aren’t operating under your own legal name, you will need to actually register the business name as a fictitious name with the Division of Corporations.
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