Which Forms of Organization Are Free of Initial Legal Requirements
No form of ownership will give you everything you desire. You have to compromise. Since each option has both advantages and disadvantages, it is up to you to decide which one offers the most important features for you. In the following sections, we compare three ownership options (sole proprietorship, partnership, corporation) in these eight dimensions. A company is structured in such a way that it has a board of directors that makes the most important decisions that guide the company. A single person can control a business, especially when it starts, but as it grows, the need to operate it as a board-run entity also increases. Even for a small business, rules meant for large organizations still apply, such as writing down all the important decisions that affect the business. >> Need a little help? Fill out our help form so we can help you create a personalized plan for your business and life. Bonus: Our services are always free. A corporation (sometimes called a regular corporation or C corporation) is different from a sole proprietorship and a partnership because it is a legal entity that is completely separate from the parties who own it.
He can enter into binding contracts, buy and sell real estate, sue and be sued, be held liable for his actions and be taxed. Once companies reach a size, it is advantageous to organize themselves as companies so that their owners can limit their liability. Thus, on average, firms are much larger than firms that use other forms of ownership. As shown in Figure 6.2, businesses account for 18% of all U.S. businesses, but generate nearly 82% of revenues.3 Most large, well-known businesses are corporations, but so are many of the smaller businesses you`re likely to do business with. In a partnership, two or more people share ownership of a single business. As with property, the law does not distinguish between the business and its owners. Partners should have a legal agreement that specifies how decisions will be made, benefits will be shared, disputes will be resolved, how future partners will be included in the partnership, how partners can be purchased or what steps will be taken to dissolve the partnership if necessary. When starting a new business, you need to decide which legal form of ownership is best for you and your business.
Do you want to own the business yourself and operate as a sole proprietorship? Or do you want to share the shareholding, operate as a partnership or as a corporation? Before we discuss the pros and cons of these three types of property, let`s touch on some of the questions you`re likely to ask yourself when choosing the right legal form for your business. Incorporation also allows companies to raise funds through the sale of shares. This is a great advantage because a company is growing and needs more funds to work and compete. Depending on its size and financial strength, the company also has an advantage over other forms of business when it comes to taking out bank loans. An established business can borrow its own funds, but when a small business needs a loan, the bank usually requires it to be guaranteed by its owners. “States have different requirements for different business structures,” Friedman said. “Depending on where you settle, there may also be different requirements at the municipal level. When choosing your structure, you understand the state and industry you are in. It`s not a one-size-fits-all solution, and businesses may not know what applies to them. “Now let`s dive into the different forms of business organization. When it comes to start-up and operational complexity, nothing is easier than being a sole proprietorship. All you need to do is register your name, start doing business, report the profits, and pay taxes on it as personal income.
However, it can be difficult to obtain external financing. Partnerships, on the other hand, require a signed agreement to define roles and percentages of profits. Companies and LLCs have various reporting obligations to state and federal governments. In 1977, Wyoming became the first state to allow companies to operate as limited liability companies. Twenty years later, in 1997, Hawaii was the last state to accept the new form of organization. Since then, the limited liability company has grown in popularity. Its rapid growth has been spurred in part by changes to state regulations that allow a limited liability company to have only one member. The trend towards LLCs can be seen by reading the names of companies on the side of trucks or on storefronts in your city.
It`s common to see names like Jim Evans Tree Care, LLC and For-Cats-Only Veterinary Clinic, LLC. However, LLCs are not limited to small businesses. Companies like Crayola, Domino`s Pizza, Ritz-Carlton Hotel Company, and iSold It (which helps people sell their unwanted items on eBay) operate in the limited organizational form. A non-profit corporation (sometimes called a non-profit organization) is an organization that was created to serve a public purpose rather than financial gain. As long as the activity of the organization serves charitable, religious, educational, scientific or literary purposes, it may be exempt from income tax. In addition, individuals and other organizations that contribute to the not-for-profit corporation can claim a tax deduction on these contributions.