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What Business Management Structure Should I Use?
Businesses can have many different management forms. These include corporations, LLCs (limited liability companies), sole proprietorships, partnerships, and limited partnerships. You can select a business management form specific to the business you plan to engage in, and the types of products and services you offer.
Some Considerations When Selecting a Business Management Structure
- What are the potential risks and liabilities of my business?
- What type of costs am I willing to incur to establish and maintain the business structure?
- What are my potential investments?
- In what manner will my state and the federal government tax the business?
Types of Business Management Structures
Here are a few commonly used business structures:
- Sole Proprietorships - A sole proprietorship has only one owner, and it can be created without formalities. In a sole proprietorship, the owner makes all the management decisions for the business. All of the profits and liabilities of the business also belong to the sole proprietor. Thus, if the business assets cannot pay the bills, the owner of the sole proprietorship will be held personally liable to the creditors. A sole proprietorship is not a legal entity - it does not exist apart from its owner.
- General Partnerships - A general partnership does not need formalities. In a general partnership, two or more individuals agree to own the business together and make management decisions for the business. The partners share the profits and financial losses of the partnership, and they are individually liable for the business debts if the business cannot pay for its bills. Additionally, a partner in a general partnership may bring contract, tort and criminal liability on to the other partner because the partners are considered agents of the other. However, partners have a duty to act in the best interest of the partnership, and a partner can sue the other partner if the other partner does not act in the best interests of the partnership.
- Limited Partnerships - In a limited partnership, there are one or more general partners and one or more limited partners. The general partners make the management decisions of the business, while the limited partners do not. However, the general partners also assume 100% of the risk for the liabilities and debts of the limited partnership. The limited partners, on the other hand, only risk the financial contributions they make to the limited partnership. Generally, all the partners in the limited partnership share the profits of the business.
- Corporations - A corporation is a legal entity separate from its owners (shareholders) and managers (officers and directors). A corporation can buy and sell property, enter into contracts, and be sued in its own name. In order to form a corporation, you must follow the specific guidelines required by your state statutes. The shareholders of a corporation are generally not responsible for the debts of the corporation aside from their financial contribution to the corporation.
- Limited Liability Companies - A limited liability company (LLC) shares the limited liability of a corporation, but is not held to the same strict management requirements under law. Similar to a corporation, one can only create an LLC by following state laws. An LLC is generally defined as a business entity somewhere between a corporation and a partnership that consists of one or more persons. The LLC has managers, members, and sometimes employees. The owners (or members) of the LLC participate in the management of the business. Members, managers and employees are not held personally liable for the debts of the business.
Should I Consult an Attorney about My Business Management Structure?
The business organization laws vary depending on the state of incorporation and the type of business you are trying to form. An attorney will help you determine what type of business structure is best for your organization. Timelines and deadlines for creating a business organization are generally strict in many states. A lawyer can assist you with following all the detailed procedural rules, contacting all the necessary state and federal officials, and adhering to the deadlines for organizing a business organization. Furthermore, an attorney can give you advice as to the tax laws that will apply to your business organization, and they will help you follow the procedural rules of your state should you desire to dissolve.
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Last Modified: 12-02-2014 04:59 PM PST
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