One of the hardest major decisions you will have to make as you start to grow your new business is the form of legal entity it will make. To a large degree, this decision may be dedicated by the way you have organized your operations and whether you intend to work on your own or in conjunction with others. As the legal forms of business organizations, you choose can have a significant impact on the way you are protected under the law and the way you are affected by income tax rules and regulations.

Factors to Consider before choosing a legal form of business organizations

The legal form of business organizations is one of the first decisions that a small business owner will have to make. The following are some factors the small business owner should consider before making the choice:

  1. The owner’s vision: Where does the owner see the business in the future (size, nature, etc.)?
  2. The desired level of control: Does the owner want to own the business personally or share ownership with others? Does the owner want to share responsibility for operating the business with others?
  3. The level of structure: What is desired, a very structured organization or something more informal?
  4. The acceptable liability exposure: Is the owner willing to risk personal assets? Is the owner willing to accept liability for the actions of others?
  5. Tax implications: Does the owner want to pay business income taxes and then pay personal income taxes on the profits earned?
  6. Sharing profits: Does the owner want to share the profits with others or personally keep them?
  7. Financing needs: Can the owner provide all the financing needs or will outside investors be needed? If outside investors are needed, how easy will it be to get them?
  8. The need for cash: Does the owner want to be able to take cash out of the business?

Legal forms of business organizations

All businesses must adopt some legal configuration that defines the rights and liabilities of participants in the business’s ownership, control, personal liability, life span, and financial structure.

The basic legal forms of organization include:

  1. Sole Proprietorship

The simplest and most common form of business ownership, sole proprietorship is a business owned and run by someone for their own benefit. The business’ existence is entirely dependent on the owner’s decisions, so when the owner dies, so does the business.

Advantages of sole proprietorship:

  • All profits are subject to the owner.
  • There is very little regulation for proprietorships.
  • Owners have total flexibility when running the business.
  • Very few requirements for starting, often only a business license.

  1. Partnership

These come in two types: general and limited.

In general partnerships, both owners invest their money, property, labor, etc. to the business and are both 100% liable for business debts. In other words, even if you invest a little into a general partnership, you are still potentially responsible for all its debt. General partnerships do not require a formal agreement, partnerships can be verbal or even implied between the two business owners.

Limited partnerships require a formal agreement between the partners. They must also file a certificate of partnership with the state. Limited partnerships allow partners to limit their own liability for business debts according to their portion of ownership or investment.

Advantages of partnerships:

  • Shared resources provide more capital for the business.
  • Each partner shares the total profits of the company.
  • Similar flexibility and simple design of a proprietorship.
  • Inexpensive to establish a business partnership, formal or informal.

  1. Corporation

Corporations are, for tax purposes, separate entities and are considered a legal person. This means, among other things, that the profits generated by a corporation are taxed as the “personal income” of the company. Then, any income distributed to the shareholders as dividends or profits are taxed again as the personal income of the owners.

Advantages of a corporation:

  • Limits liability of the owner to debts or losses.
  • Profits and losses belong to the corporation.
  • Can be transferred to new owners fairly easily.
  • Personal assets cannot be seized to pay for business debts.

  1. Limited Liability Company (LLC)

Similar to a limited partnership, an LLC provides owners with limited liability while providing some of the income advantages of a partnership. Essentially, the advantages of partnerships and corporations are combined in an LLC, mitigating some of the disadvantages of each.

Advantages of an LLC:

  • Limits liability to the company owners for debts or losses.
  • The profits of the LLC are shared by the owners without double-taxation.

Knowing the fundamentals of business organization is essential for a business aspirant student because it is the foundation upon which he or she may opt to establish his or her own company.

If you need assistance with choosing one of the best legal forms of business organizations, reach out to our experts at “Consortio Law Firm” for the legal assistance you need. We can help clients clarify their business choices.

So, Contact us Now via the phone number 002 01028806061 or send us a WhatsApp or email Info@consortiolawfirm.com.