Types of business ownership and formation structures

Business Laws

The most common types of laws that may apply to a business fall into several categories.

Business Formation Laws variety of state laws govern what steps are needed to take to properly form and operate the business entity. List below are the forms of business ownership:

Sole Proprietorships

The vast majority of small business starts 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 proprietors 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.

Partnerships

In 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.

Corporations

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.

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 the 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.

Corporations corporations are domestic corporations that can avoid double taxation by electing to be taxed under Subchapters of the IRC. The corporation can have no more than 75 shareholders and only certain individuals and entities are allowed to be shareholders. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income.

Consumer Protection Laws

Many federal and state laws protect consumers from fraudulent business acts, misleading advertisements and defective products. These laws also mandate various credit rules and disclosures.

Punitive Damages

Consumer protection laws place a potent weapon in the hands of buyers. In an ordinary lawsuit, a plaintiff can recover only his or her actual losses.

Most consumer protection laws contain a broad prohibition on "unfair or deceptive practices." In addition, many statutes list specific practices that are forbidden, such as deceptive advertising and pricing.

Deceptive Advertising

Under both federal and state law, an ad is unlawful if it tends to mislead or deceive, even if it doesn't actually fool anyone. If the ad is deceptive, the company will face legal problems whether it is intended to mislead the customer or not. What counts is the overall impression created by the ad not the technical truthfulness of the individual parts.

Intellectual Property Laws

Intellectual property laws generally apply to: 1) copyright - protect the expression of ideas in literary, artistic and musical works; 2) patents (Utility, Design, or Plant) - protect inventions and improvements to existing inventions; 3) trademarks - are words, names, symbols, devices and/or use images which are applied to products or used in connection with goods or services to identify their source; and 4) trade secrets - is any piece of information used by a business that isn't known to the general public. These laws protect the ideas and inventions, but they can also be used against an individual if there is an infringement on another company's rights.

License and Permit Laws

Most states and many cities and/or countries impose licenses and permits on a wide variety of businesses to operate properly.

Employment Laws

Employment Laws, includes laws regarding: hiring and firing of employees, overtime pay, child-labor, disability, worker's compensation, unemployment, employee rights, employee safety and discrimination.

Securities Laws variety of federal and state securities laws govern offering or selling stock or other securities.

Tax Laws

Tax laws including laws pertaining to the filing of tax returns and payment of:

Payroll Taxes

Withholding Taxes

Employers are responsible for withholding taxes from employees' paychecks, sending them to the proper government agencies, and other employer tax obligations.

Social Security and Medicare Taxes

Social security and Medicare taxes pay for benefits that workers and families receive under the Federal Insurance Contributions Act (FICA). Social security tax pays for benefits under the old age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part of FICA.

Federal Unemployment Tax

The Federal Unemployment Tax Act (FUTA), together with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only the employer pays FUTA tax; it is not deducted from the employee's wages.

State Unemployment Tax

State unemployment taxes are also paid by the employer and are not deducted from the employee's wages. Each state has a different rate and different wage limits from which the taxes are calculated.

Payroll Services

Generally, hiring a payroll service is a good idea for businesses in which payroll isn't the same from pay period to pay period. Businesses with hourly employees or employees earning commissions can save time and money by using a payroll service. One of the chief benefits is avoiding costly mistakes in payroll processing like failing to remit payroll taxes in a timely manner. Payroll companies calculate the amount of each paycheck and the tax obligations for each employee; print the checks; and provide payroll reports.

Federal Income Tax

Federal income tax is a pay-as-you-go tax. Business owners generally pay income taxes in quarterly estimated income tax payments.

Self-Employment Tax

Self-employment tax is a social security and Medicare tax for individuals who work for themselves, similar to social security and Medicare taxes withheld from the pay of wage earners. Social security benefits are available to self-employed persons just as they are to wage earners. Like federal income tax, self-employment taxes are paid through quarterly estimated tax payments.

State Taxes

Every state levies some form of tax on small businesses, but in some states some business structures (especially sole proprietorships) have little to no tax imposed.

Local Taxes

Local authorities may tax personal property like machinery, equipment, furniture, supplies, leased equipment, and even movable machinery used in a business. Some cities and municipalities also levy income taxes on any business operating within their borders.

Sales and Use tax

Sales taxes are added to the cost of a product or service and are generally paid by the customer. Most states and local taxing authorities impose a general sales tax on retail sales and certain services. Business owners are responsible for collecting these taxes and remitting them to the appropriate taxing authority.

Use taxes are generally levied on the sales price or rental charge for tangible personal property on which no sales tax has been paid. This most commonly occurs when the item is purchased from a business in another state and shipped to the user's state (most states do not impose sales taxes on products that are shipped to another state).

Zoning Laws

Zoning laws, which typically include local ordinances that regulate: parking, advertising and signage, use of the land surrounding the business and even the type of business that is allowed to be conduct in a specific area.