Forms of Business OrganizationOne of the first decisions that you will have to make as a business owner is how the business should be structured. All businesses must adopt some legal configuration that defines the rights and liabilities of participants in the business’s ownership, control, personal liability, life span, and financial structure. This decision will have long-term implications, so you may want to consult with an accountant and attorney to help you select the form of ownership that is right for you. Show In making a choice, you will want to take into account the following:
An overview of the four basic legal forms of organization: Sole Proprietorship; Partnerships; Corporations and Limited Liability Company follows. Please also review this summary of non-tax factors to consider. Sole ProprietorshipThe vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietorships own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business. Advantages of a Sole Proprietorship
Disadvantages of a Sole Proprietorship
PartnershipsIn a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed; Yes, its hard to think about a “break-up” when the business is just getting started, but many partnerships split up at crisis times and unless there is a defined process, there will be even greater problems. They also must decide up front how much time and capital each will contribute, etc. Advantages of a Partnership
Disadvantages of a Partnership
Types of Partnerships that should be considered: 1. General Partnership 2. Limited Partnership and Partnership with limited
liability 3. Joint Venture CorporationsA Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it. A Corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. Advantages of a Corporation
Disadvantages of a Corporation
Subchapter S Corporation A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass through directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay his/herself wages, and it must meet standards of “reasonable compensation”. This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount. Limited Liability Company (LLC) The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership. The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC’s must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests. Note that a newer type of LLC – known as the series LLC – has been available in Texas since 2009 (see Chapter 101, Subchapter M of the Texas Business Organizations Code or this link to the Texas Secretary of State website). A Series LLC allows multiple series with separate members, managers, membership interests, or asset. Each series may have characteristics of a separate LLC, such as separate rights, powers, or duties regarding specified property or obligations. Each series may also have its own business purpose or investment objective. Federal Tax Forms for LLC Taxed as a partnership in most cases; corporation forms must be used if there are more than 2 of the 4 corporate characteristics, as described above. In summary, deciding the form of ownership that best suits your business venture should be given careful consideration. Use your key advisors to assist you in the process. Source: Kenner & Speck, LC What is it called when 2 or more people own a business?As the name states, a partnership is a business owned by two or more people, known as partners. Like sole proprietorships, partnerships are able to take advantage of flow-through taxation. This means that the income is treated as the owners' incomes so it is only taxed once.
What form of business consist of two or more people to carry on as coGeneral Partnership: An agreement by two or more persons (or entities) to carry on, as co-owners, a business for profit.
When two or more people legally agree to become coA general partnership is a company owned by two or more individuals who agree to run the business as partners or co-owners. Unless otherwise agreed, each partner has an equal share of profits and losses.
What are the 4 types of ownership?Though you may have heard about a number of different types of ownership when researching business options, there are only four primary types that you'll likely have to consider: sole proprietorships, partnerships, limited liability companies and corporations.
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