Business structures and their advantages

Business Structures Overview -- There are a number of different business structures that are available to the new business owner, or someone purchasing a business. Each different structure has its own set of rules, with each having different tax and legal implications. The choice of which to use is thus based on the type of business, its overall legal liability (e.g. A rafting company vs. A resume service), the number of people involved, potential income, and potential longevity.

In business structures, a sole proprietorship is the simplest and is an unincorporated business that is owned and operated by a single individual. All profits and liabilities are the sole responsibility of this individual. This is the most autonomous of the business structures. Sole proprietorships have few formalities, few regulations and very little federal, state and local tax issues. However, it also has the least amount of liability protection for the business owner. In many ways, partnerships and corporations are similar in that they are both business organizations that have owners. A partnership is a single business in which there are two or more owners. A general partnership assumes that all duties and benefits are divided equally between members. A limited partnership allows partners to have limited liability and decisions based on a contract. A joint venture partnership acts as a general partnership, but only for a specified time period. Partnerships may be tricky in that they require certain contractual obligations to be formalized in the even one partner fails to perform or acts in some way to cause a litigious situation for the partnership.

A corporation is an independent legal organization owned by shareholders -- the corporate is thus legally responsible for liability and owns the assets as well. There are different types of corporations depending on the organizational need. The basic type and choice of corporate entity is based on whether the corporation needs to raise capital, how profits are divided, and how much protection is necessary for that particular business entity. One way to think about a corporation is that it is an entity in and of itself -- separate from the Board of Directors or owners. Thus, it may be sold, passed down, taxed, sued, or used in various financial transactions as collateral.

There are numerous advantages and disadvantages to each type of entity depending on a number of factors. For instance, a sole proprietorship can sell or transfer assets at the discretion of the owner, has no corporate tax payments, minimal legal costs and formal business requirements; but also holds the owner personally responsible for debts and obligations of the business. For partnerships and corporations, the benefits and disadvantages center more on issues and a dependency upon overall liability, number of employees, governmental rules, and expected income:

Liability -- Partners are liable for any and all of the partnership's obligations; but a corporate shareholder is liable only for the amount invested. Officers in a corporation, depending on the type, may have limited liability as well.

Management -- Corporations are overtly managed by a board of directors who defray managerial responsibilities to executives. Partnerships decide their own managerial model.

Records -- A partnership is not bound by law to keep records of its meetings and administrative functions; a corporation is required to do so.