“Form of business” refers to the way in which an organization registers with the state. This entails the structure of the business, as well as how it is organized in terms of management, employees, and liability. One of the most common business forms would be a corporation; there are many different forms of corporations, such as limited liability corporations which are commonly referred to as an “LLC,” as well as C Corporations.
In addition to corporations, other business forms include:
- General partnerships;
- Sole proprietorships;
- Non-profit organizations; and
- Small business organizations.
Each state may have its own laws governing the process of setting up a business and registering it with the state. Additionally, many states maintain considerably different tax applications that are dependent upon the specific form of business.
Depending on which business management structure a new business owner chooses when registering their company, there can be far-reaching consequences. An example of this would be how some business management structures require its owners to comply with certain formational rules.
If a business owner decides to create a limited partnership, the rules demand that there be at least one general partner who is assigned to manage the entire business. Additionally, there must be at least one limited partner who is assigned to continue operating as a lawful limited partnership.
The specific business management structure can also determine factors such as:
- How much money business owners can collect from investors;
- The number of members that are allowed to sit on the company board; and/or
- How the business will be taxed.
What Are Some Types Of Business Management Structures?
As previously mentioned, there are many different types of business management structures that new business owners can choose from when forming their company. The most common types of business management structures can be found in the U.S. Small Business Administration, or SBA website. However, because the specific type of business management structure also determines how a business will be taxed, less common alternatives can be located under specific state business laws.
Generally speaking, some of the most common types of business management structures include:
- Sole Proprietorships: These are businesses that can be formed by a single owner. Although sole proprietorships do not need to be registered with the state, it is considerably simple to do so, should the owner decide to register with their state. The lack of paperwork, as well as minimal procedural requirements, are what make sole proprietorships a simple and inexpensive option. However, because there is only one owner, they are solely responsible for all management aspects of the company. And, sole proprietors can be held liable for any risks or liabilities that are incurred by their business;
- Corporations: As previously mentioned, a corporation is a legal entity that is regulated by state law. A corporation is considered separate from its owners, meaning the shareholders; what this means is that only the corporation itself can be held liable for debts and liabilities. As there are many different types of corporations, each one is classified according to specific factors. These factors include their purpose, the number of shareholders, the amount of stock to be issued, and their overall tax structure. Some examples of standard forms of corporations include:
- C corporations;
- S corporations;
- Professional corporations;
- Foreign corporations;
- Non-profit corporations; and
- B corporations.
- General Partnerships: General partnerships are generally formed by two or more individuals who wish to be co-owners of a for-profit business. So long as both parties intended to make money from a product or service that they offer, they are considered to have entered into a general partnership. General partners can be held both individually and jointly liable for any losses or debts that are incurred by the partnership. Additionally, they can be held liable to the other partners if they breach their fiduciary duty to the business, as well as to any third parties;
- Limited partnerships: Alternatively, a limited partnership has considerably stricter requirements when compared to a general partnership. To reiterate, limited partnerships must have at least one general partner to oversee and manage the company, as well as at least one limited partner. As such, limited partners will have limited authority over this type of partnership, to the effect that they can only be held liable to the extent of their investment. Similar to general partnerships, the general partners in a limited partnership can be held both jointly and individually liable for the company’s debts and risks;
- Limited Liability Partnerships: Limited liability partnerships provide its partners with all of the same obligations and financial rights as those detailed in general partnerships. However, the partners are required to register the business with the state. Additionally, while limited liability partnerships offer the benefit of being free from the debts and liabilities of other parties as well as the partnership itself, each partner remains liable for their own actions. This includes any conduct that they personally supervise or demand; and
- Limited Liability Companies: Limited liability companies combine the tax arrangements and management styles of partnerships with the liability benefits of a corporation. As such, members of a limited liability company cannot be held responsible for the debts incurred by the business. Additionally, this structure permits members to choose how they wish to be taxed.
What Effect Does The Business Form Have On An Organization?
The form of business that you choose for your organization can have dramatically different effects on the way in which the organization operates throughout the years. An example of this would be how the form of business can influence other business legal issues, such as:
- Tax requirements and incentives;
- Liability for corporate violations, although most members of a corporation will not be held liable, because the corporation will absorb the liability;
- Distribution of business rights and voting shares; and
- Ownership of business property and assets.
Each type of business form may be associated with various risks. An example of this would be how given that many people are employed by a corporation, a person who invests with a corporation will often experience less risk. Alternatively, a person who works under a sole proprietorship must generally absorb most of the risk.
Some of the factors that a new business owner should consider when selecting a business management structure include, but may not be limited to:
- The number of owners that are forming the business;
- Whether the owner wants the ability to issue stocks and raise money from investors;
- Both federal and state tax laws in order to evaluate the tax incentives that each business management structure offers;
- How much control the owner wishes to have over company decisions and assets;
- The amount of money that the owner is willing to spend in order to register their business; and/or
- The potential risks and liabilities that they are willing to incur, both personally and professionally. An example of this would be how a person who wants to protect their personal assets from creditors should choose to form an LLC.
Additionally, new business owners should also consider:
- Wind-up or termination procedures;
- The rights that they want to possess if they decide to sell or expand on the business; and
- Their comfort level in terms of having their company details exposed to the general public.
Do I Need An Attorney For Assistance With Form Of Business?
If you are considering starting a business and have questions regarding which form of business you should choose, you should consult with an experienced and local business lawyer. An attorney will be best suited to helping you understand your state’s specific regulations regarding business formation, and how that will affect your decision.
Your business attorney can help you choose the appropriate form for your business and complete all legal documentation. Finally, an experienced business attorney will also be able to represent you in court, as needed, should any issues arise.