There are various ways to structure the ownership of a business, and the type you choose can have major legal and financial impacts in the future. Here, the business and legal advisors at The Law Offices of James A. List, LLC help to ensure the success of you and your business by providing a closer look at the various structures of business ownership.
The first question any business owner should ask themselves seems like a simple one: how will ownership be structured for my business? However; this question is more complex than it first seems—there are a multitude of ownership structures, and each brings differing levels of paperwork, time to create, benefits and legal or financial ramifications. Below are several of the major ownership options, including the impacts they may have on your business.
Sole Proprietorship/General Partnership
Technically, every small business starts as a sole proprietorship, or, in the case of a business begun by two or more non-married persons, a general partnership. Sole proprietorships and general partnerships require no paperwork or special permission from a state’s government—your decision to go into business, alone or with others, is all that is required to become a sole proprietor or general partner in a business. While this business structure is simple to establish, it also means that you and your business exist as one entity. If your business is sued, your personal assets are at stake, and if you file for bankruptcy, the bank can use your assets to pay off any business debts you have incurred. As such, a sole proprietorship or general partnership is best for “low-risk businesses”—small businesses with limited assets, little need for loans or a low likelihood of being sued.
Limited Partnerships are general partnerships with secondary partners who have limited influence in the business. The limited partners invest in the business, and therefore share in the profits incurred by the business. In the case of losses; however, limited partners can only lose as much as was their original investment. The trade-off for this safety net is that limited partners get little to no say in the day-to-day operations of the business—they are a “silent partner.” Because a limited partnership must be filed with your respective state, and can be costly to set up, it is strongly recommended that you speak with a qualified business law attorney before attempting to establish a limited partnership. Most business now opt for a limited liability company structure, explained below, which permit participation without personal risk.
While becoming a corporation requires an official organization structure of shareholders, officers and directors, a corporation will benefit a small business owner by separating them from their businesses’ liabilities in the case of bankruptcy, tax liabilities, lawsuits and more. Running as a corporation can also create tax deduction opportunities, but may result in licensing fees. This structure is best for business owners with large personal assets they want to protect, for businesses that will require the investment of venture capitalists or for businesses with a higher likelihood of lawsuits being filed against them.
Limited Liability Company (LLC)
A hybrid form of business between partnerships and corporations are limited liability companies (LLCs). LLCs require registration with the state. Some operate simply as partnerships, while others have corporate-type Board management. LLC Owners generally participate in more decision-making but are also protected from personal liability for business debts. Taxes flow through to the individual owners, either as a partner or a sub-chapter S shareholder.
The dedicated attorneys at The Law Offices of James A. List, LLC are excited to help your small business become a strong and well-structured entity. For any business questions or concerns you may have, contact us today.