Starting, running, and growing a business can be an exciting, but at times stressful, endeavor. You have many rules you need to follow, procedures to complete, and legal paperwork to keep track of.
Among these considerations is finding and abiding by the correct structure of your business organization. Which type of business you run will impact the laws and regulations that apply to you, the taxes you pay, and your legal liabilities.
Many business laws fall under the federal government’s authority, but you’ll have additional considerations depending on some of your state’s laws as well.
There are many business categories that may apply to your work. These depend on things like the number of owners and employees you have, the amount of profit you make, and the kinds of goods or services you provide. You’ll generally need to claim or register a specific structure that applies to your business.
Some of the most common types include:
A sole proprietorship is a business owned and run by just one person, usually on a fairly small or informal scale. You may not even need to formally file or register your business on the federal level if you’re a sole proprietor, though you may have to register in your state, and you’ll still have applicable taxes to pay that relate to your work. Unless you register as a different kind of business, your solo enterprise will typically be considered a sole proprietorship automatically.
One of the benefits to running a sole proprietorship is that they’re usually simpler to start and run than other kinds of businesses. But there are risks associated as well. The reason a sole proprietorship is much easier to start and operate than most others is because there’s no real legal separation between you and your business. That means you can be personally liable for injuries or financial errors that arise from your business dealings.
Partnerships are somewhat similar to a sole proprietorship in that they’re generally simpler than bigger organizations and the owners face personal liability. A partnership, however, has at least two owners or managers instead of just one, which adds a level of complexity to the business.
Some partners in a business share all costs and liability evenly. These are typically known as general partnerships. A limited liability partnership, where one person usually has more liability and greater control over the business than the other, is less common than the general partnership.
Because there are more people involved in owning and running the business, there are additional legal and financial elements to consider. Partnerships should always have a contract between the partners that specifies the nature of their roles and responsibilities.
A limited liability company (LLC) has greater protections for the business owners than partnerships and sole proprietorships, because it separates more personal assets from the business. An LLC will usually have more than one owner, as LLCs with only one owner have a slightly different classification.
LLCs require more formal registrations with the government, particularly at the state level. Taxes are usually paid through the owners’ personal tax filings and not separate filings as a business. If one member of the LLC leaves, their business interests are usually then split and shared among the other members. This exact process should be included in a business contract.
Corporations are usually more formalized businesses that protect owners and operators from personal liability. There’s a much greater separation between the business and the owners in a corporation. Corporations pay taxes as a business, for example. As such, corporations can require more paperwork, regulation, and contractual considerations.
The structure of a corporation usually includes different shareholders who have a stake in the business. There could be just a couple of shareholders or many, and shareholders can have varying levels of involvement in the business. In general, shareholders get a vote in business decisions, though a specified Board of Directors typically manages the business and can make some choices on their own. They will be the ones most responsible for following the legal guidelines and financial regulations of the business.
A non-profit organization is a specific version of other business structures, from corporations to sole proprietorships. While general businesses exist to earn the owners, shareholders, and employees profits, non-profits usually have a social or communal mission and don’t have profits. Churches, charities, and other public organizations are commonly non-profits.
Non-profits often rely heavily on donations. As such, they’re generally exempt from most business taxes. They have strict regulations to follow, including a requirement to provide some kind of public services, to stay mainly apolitical, and can only pay its members and operators under specific rules and circumstances. Non-profits therefor may rely on volunteer workers.
Choosing a structure for your business can be a hard decision to make. You have to consider how each option may impact your income, if you want to share ownership or run it yourself, and what kind of risks are associated with your type of business to determine liability requirements.
Once you’ve decided on the right kind of business for you, you’ll need to file the correct paperwork. Errors in how you register or in the reports you submit could result in fines or even a total closure of your business. Working with certain business experts, like an experienced business attorney, can help you make the right decisions and follow the correct procedures for keeping your business up and running.
This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified business organizations lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a local business organizations attorney to discuss your specific legal situation.
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