Ultimate Guide to Structuring a Business

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Most Common Business Law Issues:

What is Business Law?

Business law is a broad term referring to federal, state, and local laws governing the formation and daily operation of all business entities, from sole proprietorships to corporations. Understanding the basics of each structure is essential to determining the best structure for your business. Additionally, it is useful when determining whether to alter your existing business to a new structure or selling a business to another party.

What Is a Business Structure?

Business structure is a term used to describe the way a business is organized in terms of leadership, direction and rights/liability. Additionally, how you structure your business is an important decision to make as it can affect the following areas:

Common business structures include:

There are four different types of corporations including C Corporations, S Corporations, Professional and Nonprofit Corporations.

What Are the Advantages of Sole Proprietorships? 

There are many advantages to a sole proprietorship, the majority of which include:

What Are the Disadvantages of a Sole Proprietorship?

There are disadvantages to a forming a sole proprietorship including:

What Are The Advantages of a Partnership? 

There are many advantages to a partnership which make it an attractive option when determining a business structure. These advantages include:

What Are the Disadvantages of a Partnership?

Despite these advantages, there are a few important disadvantages to a partnership which should be considered in depth. For example, a partnership will not extend beyond the life of a partner. If one hopes that their business have longevity, a partnership may not be the best option as it will dissolve upon any partners' death. 

Additionally, partnerships have less restrictions on the manner in which the business is controlled. While some may view this as an advantage, for those working with other partners may prefer to have a more strict structure, such as in a corporation. A corporation's structure may ensure that no one acts in a manner that may endanger the corporation. 
Partnerships also tend to limit the growth of a business because control is localized to a few individuals rather than members of a board. Partnerships are likely more suitable for start-up ventures and temporary projects as opposed to long-term businesses.

What Are the Advantages of a Limited Liability Company? 

One of the major benefits of a Limited Liability Company or LLC, is that the single member can be the sole owner of the business. As a single member LLC, that member/owner can make their own business decisions regarding their business without having to consult or receive majority approval from other partners or board of directors. Similar to a sole proprietor, the sole member owns, manages, and operates their business the way they want to without liability issues related to a sole proprietorship. Additionally, if there is more than one member in an LLC, the Operating Agreement for the LLC can specifically spell out the respective roles of each member within the LLC. This can make it easy to manage as each member has their own respective tasks and responsibilities. 

Another major advantage of an LLC is the limited liability characteristic. An LLC, similar to a corporation, is a separate entity from its individual members or owners. Members of an LLC are not personally liable for the debts and liabilities of the LLC. There are instances however when members of an LLC can be held personally liable for their actions, for example, if a member personally guarantees a business debt or fails to use due care resulting in harm to a third party or breach of duties to the LLC. 

In contrast to a corporation, an LLC is considerably easier to manage than a corporation. Although an LLC requires registration with the state by filing Articles of Organization for the LLC with the Secretary of State, this can often be the extent of management for the organization. LLC's are not required to hold meetings and report their meetings to the state, however, LLCs do require annual fee and filing obligations. 

LLCs permit the members to determine how profits of the business will be allocated under the terms of their operating agreement. LLC members are also not limited to only be permitted profit sharing to the proportion of ownership of the LLC, but can decide to divide up the profits in a different manner.

What Are the Disadvantages to a LLC? 

Some disadvantages to a LLC include the following:

While an LLC offers many of the advantages of a partnership and a corporation, it has definite downsides which should be considered prior to moving forward with this option.

What Are the Advantages of a Corporation? 

A corporation must file Articles of Incorporation in the state in which they are incorporated. Additionally, corporations must hold organizational meetings in which they elect corporate officers, to determine authorized classes of shares, and to draft and enact bylaws which provide for the corporation's internal structure. Board of directors of a corporation are directed to hold meetings regularly to discuss, vote and finalize business strategies, finances, and internal policies. Annual shareholders meetings are also required. Like LLC's corporations must file annual reports and pay yearly fees to retain their corporate status. 

Other advantages include the fact that a corporation can outlive its founders and owners. Ownership is easy to transfer and consumers and investors are guaranteed that the business will remain stable. This makes a corporation an attractive investment opportunity which can aid in business growth. In addition to the longevity of a corporation, through the sale of stock, a corporation can also attract additional investors which in turn help the business grow. 

Corporations maintain credibility and reputation that other businesses have difficulty growing or maintaining. Corporations can be expenses and time consuming to create and maintain, therefore, if a corporation has a great reputation, the public is assured that the corporate is stable and a contributing member of the surrounding communities.

What Are the Disadvantages of a Corporation?

A major disadvantage in the creation of a corporation is that the creation and maintenance of a corporation can be expensive. There are a myriad of fees which are required at the onset of the creation of a corporation and multiple fees required to maintain a corporation in good standing on an annual basis.

There is also a tax liability for corporations that outweigh that of other business structures. Corporations are considered separate legal entities that require a separate tax return and corporations are also subject to double taxation.

Do I Need an Attorney?

If you are planning to start a business or hope to alter an existing business structure, a business law attorney can help to outline the advantages and disadvantages associated with each business model.

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Last Modified: 05-10-2017 06:30 PM PDT

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