Once you have decided on the type of business to establish, you must determine the legal structure of the business. There are three basic types of legal structure of a business:
1. The Sole Owner
3. The corporation
1. The Sole Owner;
Most businesses with one or more employees choose to be sole proprietorships.
- Costs are minimal (only fictitious business name, bank account, and business license are required)
- Owner Unique it does not have double taxes on profits, as in other business structures such as corporations. All taxes are reported on the owner’s individual return.
- Owner Unique You can easily transfer your business by selling all the parts or a portion of your assets.
- The owner has unlimited liability for the business and vice versa, because legally there is no difference between the owner and his business.
- The partnership is limited to only one person, you cannot integrate a partner.
two. The society.
The main advantage of a partnership is that it allows you to integrate one or more partners to invest in the business. It also avoids double taxes.
- Each partner is jointly, severely and personally liable for the obligations of the partnership. If the assets of the company are insufficient to satisfy a creditor’s claim, the personal assets will be liquidated to pay the debts of the business.
- The company is legally responsible for the commercial actions of each partner. A creditor could choose to sue only one of the partners for the entire amount of the debt. If one partner is unable to pay, the others could be held liable for the debt.
- A partnership cannot be transferred as fast as in corporations. In many states a partnership interest cannot be transferred without the consent of all partners, unless it has been established in the partnership contract.
There are two types of partners:
General partners: Responsible for all business losses
Limited Partners: Not personally liable for business losses, only the amount of your initial investment is at risk.
A limited partnership must include at least one general partner along with one or more limited partners.
A partnership lasts as long as the general partners remain in the partnership. Once a general partner dies or leaves the partnership, the partnership is dissolved and the assets must be sold to pay the first creditor of the partnership and then the partners themselves.
Many states charge an initial fee for filing the partnership papers plus an annual fee.
3. The corporation.
A corporation is formed by issuing shares to its owners, who are then known as shareholders. The corporation is a separate legal entity from its shareholders, therefore there is no personal liability for business losses.
Exceptions to this rule include: shareholders do not keep their personal accounts and assets separate from those of the corporation or shareholders who do not meet the statutory requirements to manage the corporation. For example, in case of fraud, shareholders can be sued individually.
A corporation can have only one owner or many owners, such as doctors and lawyers, registered as Professional Corporations.
Each corporation must have: a Board of Directors, which meets annually to make the most important decisions of the corporation; and officers, who are responsible for running the day-to-day business.
Owners who also work as employees receive salaries plus a dividend or stock distribution, if the corporation makes a profit.
- It is easy to transfer ownership in a corporation, simply by selling the shares.
- Favorable tax treatment.
- Limitations on your personal liability.
- Higher contributions to your retirement fund.
- Wide range of benefits for employees and owners. (Mileage compensation, health insurance, spending flexibility, etc.)
- Creation of the organizational structure.
• The main disadvantage of a corporation is that profits are taxed directly to the corporation, and then again to each shareholder when they receive a dividend from the profits. This is called a double tax.
To create a corporation, the owners must agree to:
• The name of the business
• The total number of shares that the corporation can sell and issue
• The number of shares that each owner will buy
• The amount of money or properties with which each owner will contribute to buy their shares
• The business in which the corporation will do business
• Who will manage the corporation, the board of directors and the officers
The owners then have to file the articles of incorporation or a certificate of incorporation with the incorporation office of the state in which they want to incorporate.
Most states charge a filing fee plus an annual fee.
The corporation, as a separate legal entity, requires its own bank account and registration. The money earned by the corporation belongs to the corporation, not the shareholders.