Choosing the Right "Boat" for the High Seas of Business

Biz Startz ~> First Steps ~> (End of First Steps section)

Five Common Legal Structures for Business Ownership

Characteristics

Some Advantages

Some Disadvantages

Sole Proprietorship

You are personally responsible for all the work, all the debts, and all the risk
If sued, you could lose your personal belongings and money, as well as business assets
No stock; difficult to transfer ownership
The business assets pass to your heirs if you die, rather than staying in the business

General Partnership

A business owned by two or more people called partners
A written partnership agreement is not legally required, but a very good idea to have
Usually operates under a business name

Shared ideas, capital, and resources may offer a stronger base for business success
Profit or loss may be divided however the partners choose
Although a partnership must file its own tax returns, each partner's share of income flows through to his or her own income tax return

S-Corporation

Provides legal protection for the shareholders' personal assets
Shareholders generally are not personally liable for debts of or claims against the corporation
Can raise money (capital) by selling stock
No double taxation; profits and losses are passed through to shareholders and included on individual tax returns
Has continuous existence regardless of death or change of ownership

Costs just as much as a C-Corporation to form
Strict accounting and financial reporting is required
Must have corporate board of directors' and shareholders' meetings
Cannot have more than 75 shareholders and they all (with a few unusual exceptions) must be individual legal residents or citizens of the U.S.
Can only sell common stock, following strict government regulations

C-Corporation

A business that can be owned by single or multiple shareholders
Created by filing articles of incorporation with the appropriate state agency
Exists as an artificial, single legal entity entirely separate from its owners
Can be privately held by shareholders, or "go public" with shares being traded on the stock market
Bylaws of the corporation tell how it will be run

Provides legal protection for the shareholders' personal assets
Shareholders generally are not personally liable for debts of or claims against the corporation
Can raise money (capital) by selling stock
Allowed to sell both common stock and preferred stock
Has continuous existence regardless of death or change of ownership

Legal fees to form a corporation are high; there are annual recurring costs
Government requires strict accounting and financial reporting
Corporate profits are taxed, and shareholders' earnings (dividends) are taxed as well, resulting in double taxation
Board of directors' meetings and shareholders' meetings must be held
Selling shares of stock must follow strict government regulations

Limited Liability Company (LLC)

A legal entity that exists seperately from its owners
Created by filing articles of organization with the appropriate state agency
An operating agreement (similar to a partnership agreement) tells how the company will be run

Risk is generally limited to the amount of capital an owner invests in the business
Members generally are not personally liable for debts of or claims against the company
No double taxation; profits and losses flow through to members' individual tax returns
Foreign investors allowed