One of the first and arguably the most important decisions that a new business owner will need to make is choosing the right type of business management structure when registering their business. The reason as to why this decision is so crucial to operating a successful business is because it can have a substantial impact on the future of the company.
There are a number of different business management structures that new business owners can select from, such as a C Corporation, general partnership, or limited liability company. Depending on which business management structure a new business owner uses when registering their company, it can have far-reaching consequences.
For instance, some business management structures require that its owners comply with certain formational rules. As an example, suppose you decide to create a limited partnership. The rules for a limited partnership demand that there be at least one general partner assigned to manage the entire business and at least one limited partner to continue operating as a lawful limited partnership.
Additionally, the business management structure can also dictate things like how much money business owners can collect from investors, the number of members who are allowed to sit on a company board, and/or the way in which the business will be taxed.
Given the complex laws surrounding business management structures, it may be in your best interest to contact a business attorney if you need help choosing which structure to use when registering your business.
What Should I Consider When Selecting a Business Management Structure?
Some factors that a new business owner should consider when selecting a business management structure include:
- The number of owners that are forming the business (e.g., single proprietor, multiple members, etc.);
- Whether they want the ability to issue stocks and raise money from investors;
- Review both federal and state tax laws to evaluate the tax incentives that each business management structure offers;
- How much control the owner wishes to have over company decisions and assets;
- The amount that the owner is willing to spend to register their business; and/or
- The potential risks and liabilities they are willing to incur both personally and professionally (e.g., an individual who wants to protect their personal assets from creditors should choose to form an LLC).
In addition, new business owners should also consider wind-up or termination procedures, the rights they want to possess should they decide to sell or expand on the business, and their comfort level in having company details exposed to the general public (e.g., corporations vs. sole proprietorships).
Types of Business Management Structures
There are many different types of business management structures that new business owners can choose from when forming a company. The most common ones can be found on the U.S. Small Business Administration (“SBA”) website. However, since the type of business management structure also dictates how a business will be taxed, less common alternatives can be found under specific state business laws.
In general, some of the most popular types of business management structures include:
- Sole proprietorships: Sole proprietorships are businesses that can be formed by a single owner. It does not need to be registered with the state, however, they are very easy to set-up should the owner do so. The lack of paperwork and minimal procedural requirements make sole proprietorships a simple, inexpensive option.
- Since there is only one owner of a sole proprietorship, they are responsible for taking care of all management aspects of the company. Additionally, sole proprietors can be held liable for any risks or liabilities incurred by the business.
- Corporations: A corporation is a legal entity that is regulated by state law. A corporation is considered separate from its owners (i.e., the shareholders), which means that only the corporation itself can be held liable for debts and liabilities. There are many different types of corporations and each one is classified in accordance with specific factors, such as their purpose, the number of shareholders, the amount of stock to be issued, and their overall tax structure. Some standard forms of corporations include:
- C corporations;
- S corporations;
- Professional corporations;
- Foreign corporations;
- Non-profit corporations; and
- B corporations.
- General partnerships: Although there are four different kinds of partnerships, a general partnership is the option that is elected most frequently by new business owners. It is typically formed by two or more individuals who wish to be co-owners of a for-profit business. In other words, so long as both parties intended to make money from a product or service they offer, they are deemed to have entered into a general partnership.
- In such a formation, general partners can be held both individually and jointly liable for any losses or debts incurred by the partnership. They can also be held liable to the other partners if they breach their fiduciary duty to the business and to third parties.
- Limited partnerships: In contrast, a limited partnership has much stricter requirements than a general partnership. As discussed above, limited partnerships must contain at least one general partner to oversee and manage the company, as well as at least one limited partner. Accordingly, limited partners will have limited authority over this type of partnership and thus can only be held liable to the extent of their investment.
- Similar to general partnerships, the general partners in a limited partnership can be held both jointly and individually liable for company debts and risks.
- Limited liability partnerships: Limited liability partnerships provide its partners with the same obligations and financial rights as those found in general partnerships. However, with limited liability partnerships, the partners are required to register the business with the state.
- Also, while limited liability partnerships offer the benefit of being free from the debts and liabilities of other parties and the partnership itself, each partner will remain liable for their own actions or any conduct that they personally supervise or demand.
- Limited liability limited partnerships: The fourth kind of partnership also happens to be one of the rarest forms of business management structures. This is because these organizations are not recognized by every state. Limited liability partnerships can only be formed in compliance with a state statute. In states where they are recognized, they are mainly chosen for tax purposes.
- These structures have similar requirements to those of limited partnerships with one major exception: general partners cannot be held personally liable under this formation.
- Limited liability companies: Limited liability companies combine the tax arrangements and management styles used in partnerships with the liability benefits found under a corporation. Thus, members of a limited liability company cannot be held responsible for debts incurred by the business. This structure also permits members to choose how they wish to be taxed.
Should I Consult an Attorney about My Business Management Structure?
As is evident from the above discussion, the way you structure your business can have far-reaching consequences. Therefore, you should strongly consider hiring a local corporate attorney for advice on the best way to structure your new business.
An experienced corporate attorney will be able to inform you of the potential risks and liabilities associated with a particular business management structure. Your lawyer can also help you fill out the necessary paperwork and can walk you through the business registration process in your state.
Additionally, if you need to modify the kind of business management structure that your business is registered as or need assistance with dissolving your company, your lawyer will be able to help you complete these tasks for your business as well.