Corporations, LLCs, Partnerships, Etc. Lawyers

One of the key decisions that a new business owner will need to make is choosing the right type of business management structure for their company. This decision is crucial because it can have a substantial impact on the future of the company, including the type of risks it poses to the owner, its tax status, and more.

There are several different business management structures that new business owners can select from. Those considered in this article are a sole proprietorship, a corporation, a few types of partnerships, and a limited liability company.

The choice of the business management structure of the new company will have consequences. For instance, some types of businesses require owners to comply with certain formational rules.

As an example, suppose you decide to create a limited partnership. The rules for a limited partnership demand at least one general partner assigned to manage the entire business, as well as at least one limited partner who is essentially just an investor and does not have any operational responsibilities in the company. This is more complex than a sole proprietorship, where someone simply opens a business independently.

The choice of business management structure can also dictate things like how much money business owners can collect from investors, the number of members who are allowed to (or must) sit on a company board, or how the business will be taxed.

Given the complex laws surrounding business management structures, it may be in your best interest to contact a business attorney if you need help choosing which structure to use when forming and registering your business.

What Should I Consider When Selecting a Business Management Structure?

Some factors that you should consider when selecting a business management structure include:

• The number of owners that are forming the business (e.g., single proprietor, multiple partners, etc.)
• Whether you want the ability to issue stock and raise money from investors
• Federal and state tax laws must be reviewed to evaluate the tax incentives that each business management structure offers
• How much control do you wish to have over company decisions and management of assets
• As a practical matter, the amount of time and money that you are willing to spend to form and register your business
• The potential risks and liabilities you are willing to incur both personally and professionally. For example, an individual who wants to open a business by themselves and also wants to protect their assets from the business’s creditors should choose to form a limited liability corporation rather than a sole proprietorship because the corporate structure protects their assets.

In addition, you should also consider wind-up or termination procedures for each type of business structure, the rights you want to possess should you decide to sell or expand on the business, and your comfort level in having company details exposed to the general public (e.g., corporations must publicly disclose certain information that sole proprietorships do not have to do).

Types of Business Management Structures

There are many different types of business management structures that new business owners can choose from when forming a company. The most common ones are on the U.S. Small Business Administration (“SBA”) website. However, since the type of business management structure also dictates how a business will be taxed, less common alternatives can be found under specific state business laws.

Some of the most popular types of business management structures include:

• Sole proprietorships: Sole proprietorships are businesses . They do not need to be registered with the state, but if you choose, the process is very easy. The lack of paperwork and minimal procedural requirements make sole proprietorships a simple, inexpensive option.
  • Since there is only one owner of a sole proprietorship, they are responsible for taking care of all management aspects of the company. Sole proprietors can be held liable for any risks or liabilities incurred by the business. In essence, the business is one aspect of them, and if the business gets sued, for example, the owner is fully responsible.
• Corporations: A corporation is a legal entity regulated by state law. A corporation is considered separate from its owners (i.e., the shareholders), which means that only the corporation itself can be held liable for debts and liabilities. The investors (i.e., the owners) are protected from any company liabilities.
  • There are many different types of corporations, and each one is classified per specific factors, such as their purpose, the number of shareholders, the amount of stock to be issued, and their overall tax structure. Some standard forms of corporations include:
    • C corporations
    • S corporations
    • Professional corporations
    • Foreign corporations
    • Non-profit corporations
    • B corporations
• General partnerships: Although there are four different kinds of partnerships, a general partnership is the option that is elected most frequently by new business owners. It is typically formed by two or more individuals who wish to be co-owners of a for-profit business. Whether or not they intend to do so, if two or more people intend to make money from a product or service they offer, unless they create a separate type of business structure, they have formed a general partnership.
  • In such a formation, general partners can be held individually and jointly liable for any losses or debts incurred by the partnership. They can also be held liable to the other partners if they breach their fiduciary duty to the business or third parties.
• Limited partnerships: In contrast, a limited partnership has stricter requirements for setting it up than a general partnership. Limited partnerships must have at least one general partner to oversee and manage the company, as well as at least one limited partner.
  • Limited partners are essentially investors and have little to do with running the business. If the partnership loses money or gets sued, limited partners can only be held liable to the extent of their investment. On the other hand, the general partners in a limited partnership can be held both personally, jointly, and individually liable for company debts and risks.
• Limited liability partnerships: Limited liability partnerships provide their partners with the same financial rights as those in general partnerships. However, with limited liability partnerships, the partners must register the business with the state.
  • Also, while limited liability partnerships offer the partners the benefit of being free from responsibility for the debts and liabilities of the other partners and the partnership itself, each partner will remain liable for their own actions or any conduct they supervise or demand.
• Limited liability companies: Limited liability companies combine the tax arrangements and management styles used in partnerships with the protected liability benefits found in a corporation. Members of a limited liability company cannot be held responsible for debts incurred by the business. This structure also permits members to choose how they wish to be taxed.

Should I Consult an Attorney about My Business Management Structure?

As can be seen from the complexity of the descriptions of the different forms of businesses, the way you structure your business can have far-reaching consequences. Therefore, you should consider hiring a local corporate attorney for advice on the best way to structure your new business.

An experienced corporate attorney will be able to inform you of the potential risks and liabilities associated with a particular business management structure and will do so with your business in mind. Your lawyer can also help you complete the necessary paperwork to register your company in your state. Your attorney will also be able to explain the tax benefits of some types of businesses compared to others.

Additionally, if you need to modify the kind of business management structure that your business is registered as, or if you need assistance with dissolving your company, your lawyer will be able to help you complete these tasks for your business as well.