An Introduction to Business Ownership Structures

Before someone can decide how to structure his or her business, it is important to understand what options are available. The following is a brief list of the most traditional business ownership structures:

  • Sole Proprietorships
  • Business Partnerships
  • Limited Business Partnerships
  • Limited Liability Companies
  • For-Profit Corporations
  • Non-Profit Corporations
  • Cooperatives

Sole Proprietorships

For most business owners, the single best method of structuring the business is through a sole proprietorship. This, of course, is only when one single owner is involved in the ownership of the business. Unlike corporations or limited liability companies, a sole proprietorship does not require being registered with the state. When entering a business as a sole proprietor, there is no need to file any particular documents in order to set up the ownership. The owner will simply enter the business by his or her self.

It is important to understand that when a business owner enters into a sole proprietorship, the business owner cannot be considered legally detached from the business. What this means is that the owner will be responsible for reporting all business incomes as well as any losses the business has endured on to his or her personal tax forms. Thereby, making the business owner responsible for any business-related commitments such as any debts the business has gained as well as any possible court judgments and/or proceedings.

Business Partnerships

The second most common method of structure for a business owner is that of a business partnership. A business partnership entails the ownership of a business held by two or more individuals. Like a sole proprietorship, a partnership does not need to file any special documentation in order to become a partnership. Instead, the arrangement begins as soon as the business excursion begins.

Also similar to sole proprietorships of a business, business partners are responsible for paying their each individual shares of the business income on his or her own personal tax filings. These individuals are also responsible for any business claims and/or debts.

Business partnerships can have a lot of benefits in the startup of business as opposed to starting a business alone. The sharing of expenditures is one of the greatest attributes. With a partner, business owners can divide the many responsibilities of a business. When a partnership is arranged, a contract can assert the separation of all business-related responsibilities. The contract between the partners is not necessarily required at the start of the business. However, it could prevent disputes later on. These contracts are often regarded as protecting the relationships between partners.

Considering entering into a business as a sole proprietor or as a partner? Remember that these two business arrangements are best when there is little exposure to personal liability within the business. An example of this is a small service type business in which business owners are the least likely to be sued.

Limited Partnerships

The creation of limited partnerships are usually transpired when one partner, considered to be the general partner, will solicit a form of investment from the other partner(s), also known as limited partners. In a limited partnership, the general partner will often be responsible for the everyday operation of the business. Unless the limited partnership petitions for a limited liability company or a corporation, the general partner is also responsible for any business-related debts acquired. Since most limited business partners have a small amount of control over business-related decisions, they are also not directly responsible for any business claims or debts.

Limited Liability Companies and Corporations

Establishing a limited liability company or corporation can be a pricey and complex procedure. Although the process can be strenuous, it can nonetheless prove to be valuable for a small business owner. This is because when forming a limited liability company or a corporation, these arrangements will limit the business owner’s personal responsibility for business-related debts and/or any court judgments made against the company.

When a corporation is established, business owners have thereby declared an independent entity, apart from the business. Business owners will no longer be required to file for their personal taxes in conjunction with the business. When a corporation is arranged, it then becomes a separate entity. It will then require its own tax forms to be completed.

Similarly, limited liability companies will provide limited personal responsibilities for all business acquired debts and/or claims. When it comes to filing taxes, however, limited liability companies are similar to that of partnerships: business owners will be required to pay for their shares of all business incomes in their personal tax returns.

Petitioning for a corporation of a limited liability company can be beneficial for business owners who run the risk of acquiring debts or being sued. These arrangements can also prove to be highly beneficial if a business owner is looking to protect his or her personal assets from creditors.

Non-profit Corporations

A not-for-profit corporation is a business arrangement formed for educational, religious, or other charitable purposes. Non-profit corporations can raise money by asking for public and/or private grants and other donations. Generally, federal and state governments do not tax non-profits on the income collected. This is because non-profit corporations are seen as beneficial contributors to society.

These types of business entities are at their core still corporations and the formation of them does require the filing of various forms with the required state and federal agencies. In addition to the standard corporate formation filings, additional documents to obtain the non-profit status may be required to also take advantage of the numerous non-profit benefits.

Cooperatives

Business organizers who refer to the business as a so-called co-op or collective arrangement can do so informally. Generally, these types of arrangements are frequently utilized by retail businesses. It is important to note, however, that many states have specific laws that deal with the documents that must be filed for this type of business. An experienced business attorney in your state will have more information regarding this and other business ownership arrangements.