Business Structure Sample

Choosing Your Business Structure: The Five Main Types of

Business
You have started your business and you are now beginning to understand just how much time
and work is needed - you need to consider the different kinds of business choices available.
There are five different models for the way businesses are formed, organized, and operated: sole
proprietorship, partnership, corporation, limited liability corporation (LLC), and limited liability
partnership (LLP). This article will analyze these various business structures and find out what
they are and their respective pros and cons.
Sole proprietorship.
In its simplest form, a sole proprietorship is a business that is owned and operated by one
individual. They are often the most popular kind of small business organization. While this
means you are the sole boss of your company, it also means from a legal standpoint that you
have sole responsibility over the business. Unfortunately, this means that if your business fails,
legal and financial liability can extend to not only your business, but your personal assets as well.
This is the main disadvantage that you should be aware of when considering organizing your
business under a sole proprietorship structure.
Nevertheless, if you decide the risks are something you can deal with, there are also several
advantages to operating a sole proprietorship business. Some of the main pros of this kind of
organization include their ease of formation and initiation, they are regulated less by the
government, and they can be subject to lower taxes. Sole proprietorships also have lower start-up
costs, and it is easier to handle the money flow going in and coming out of your business.
Partnership.
A partnership is simply a non-corporate form of business ownership with two or more owners.
Similar to a sole proprietorship, legal and financial liabilities can extend to the owners personal
assets and also those belonging to the business. If a business fails to meet any of their financial
obligations, creditors can legally go after any of the partners individual assets to satisfy the
business debt. In addition, if a creditor is unsuccessful at collecting what is due, the creditor can
legally seek the entire amount from any of the partners in whatever percentage they can to pay
their obligation. This means that the partner who has the most personal income can
hypothetically stand to lose the most from this kind of business venture should it go into default
with creditors.
Partnerships also involve more complex rules regarding formation of the business. Because more
than one individual owns and operates the business; profits, losses, responsibilities, and liabilities
will need to be divided to avoid conflict. It is strongly recommended that if you consider this
kind of business organization, you seek the assistance of a lawyer. You will want him or her to
write up a formal partnership agreement that clearly spells out each partners rights and
responsibilities in relation to the business. In addition, if one of the partners dies or withdraws

from the partnership, or you decide to take on an additional partner, the original partnership
immediately becomes terminated and a new partnership needs to be drawn up.
Sole Proprietorship or Partnership: How to Decide
The first step in deciding which business style would work best for you and the needs and goals
of your business is to think about your work style. Do you work better independently or with
someone else? Can you handle having to complete all of the necessary work by yourself? Would
it be easier to divide the work with another person? Would the quality of work suffer if you have
to handle all aspects of the business? Thinking about the big picture helps you to see the personal
pros and cons for your business.
Consider the liability aspect of business ownership. Can you afford to be solely responsible
should your business fail? What would you do if your creditors came after your personal
property and assets?
Next, think about sharing business decisions. Are you comfortable sharing the business decisions
and the direction of your business with someone else? Is there someone that you trust with your
business? Would your business benefit from someone elses business-savvy know-how?
If you are confident in making all of the business decisions on your own, assuming sole liability
for the business, and you can handle the workload with just the help of support staff, a sole
proprietorship may be a good choice for your notary-based business.
On the other contrary, if you feel your business would profit from having another partner who
could share the responsibilities and liabilities with you, and also offer business experience, a
partnership may be the way to go. Just take note that choosing a business partner should not be a
decision that you make without careful consideration. Make sure your potential partner(s) is
responsible and shares the same goals for your business. Do not choose a friend or family
member unless you can keep the personal and professional relationships separate. Bear in mind
that choosing an incompetent partner can cost you your business.
Corporation.
Corporations make up about twenty percent of all businesses operating in the United States.
They operate differently from partnerships and sole proprietorships. A corporation is considered
a legal entity separate from its owners. This is a major advantage because if the corporation is
sued, defaults to creditors, or goes into bankruptcy, the shareholders are only limited to the losses
they initially invested into the business. Essentially, this gives the stockholders limited liability.
While this may sound appealing thus far, it is important to note that the stockholders can be held
personally liable for the actions of the corporation. For instance, a corporation must adopt bylaws, conduct regular meetings, and elect officers. If these obligations are not followed and the
business does not conduct its business affairs as a corporation, it can be treated as a
proprietorship or partnership. This can mean that the owners of the business become personally
liable. Also, if the corporation participates in any illegal activity, the owners can be held
personally liable.

There are other drawbacks to a corporation as well. It takes more money to start a corporation as
opposed to other kinds of business organizations. The process required just to incorporate costs
thousands of dollars. Another downside is that it is more time-consuming to form a corporation.
There is much more paperwork that must be filed to establish a corporation. The largest con of a
corporation, though, pertains to taxes. Corporations are subject to double taxation because they
are legal entities. They are taxed once on the corporate level and a second time on the dividends
on the stockholder level.
Limited Liability Corporation (LLC).
An LLC is a mix between a corporation and partnership. The biggest advantage to an LLC is that
they offer limited liability for all of their owners. Unlike sole proprietorships or partnerships, no
one assumes unlimited personal liability. Unlike corporations, they do not have stockowners.
Instead, they have members who all share ownership of the business. When the LLC is formed, a
lawyer will draw up the articles of organization, which clearly spells out the ownership interests
among members.
There is also the possibility of organizing your business as a limited partnership. A limited
partnership is formed with several partners, where one or more are limited. This means that their
involvement within the business is strictly financial and they are restricted from making any
business decisions. The limited partner is liable only for the portion of money that he or she
invests in the business. This protects them from creditors going after their personal assets. It is
important to note that at least one partner must be a general partner, for legal reasons. The
general partner is the one who makes all of the business decisions and also assumes unlimited
liability should the business fail or face financial problems.
Limited Liability Partnership (LLP).
An LLP has several advantages; the major one is that this form of business organization provides
a means by which other people can invest in the business without having to form a corporation. It
also means that you benefit from their monetary investments without having to consult with them
about business decisions, like you would in a general partnership. In addition, if the withdrawal
or death of one of the limited partners occurs, appropriate provisions can be made in the
partnership agreement that will allow the partnership to continue without any ceasing of the
original business operations or structure.
On a side note, in case there is any confusion between an LLC and a LLP, they are
essentially the same thing. However, the one subtle difference is that an LLC with more than one
shareholder operates just like a partnership.
LLC vs. LLP: What Is Best for Your Business?
There are some drawbacks to the LLC business organization. For instance, members cannot
transfer their ownership without the unanimous written consent of the other members. In
addition, the length of time the LLC is permitted to operate is also limited; most LLCs cannot
operate for more than thirty years. Because this is a relatively new form of business ownership
and is not used as frequently as the other forms, there are still plenty of situations that may arise
within the operations and structure of an LLC that have to be addressed on an individual basis,

often by either the restrictions of the state under which the LLC was formed and under the advice
of a lawyer experienced in working with LLCs.
Now, the five business structures I have just analyzed were basically a brief introduction, to
allow a new business owner, the start-up business owner to get understanding of the five
business structures. Again, these are the different types of business choices available. I hope this
was a good starting point.
Understanding not only the type of business you're starting, but also the type of customers you
will attract, and the manner in which you will attract them, should be factored into your decisionmaking process. One has to consider the potential for liability from customer relationships or
how interactions will impact on your liability risk.
If you are a smart business person you have drawn up a business plan. From the forecasts of
your business plan you should be able to determine how fast your business will be growing. This
is important factor in determining your business structure. If you expect it to take several years
before you see a profit, you might select a Corporation or S Corporation, so that shareholders can
offset some of their personal income with losses from the business.
The sole proprietorship is the most advantageous choice for many people starting small
businesses, some opt for this method principally because it provides the easiest way in which to
start and open a business quickly. Others become sole proprietors simply because they don't
believe they can incorporate.
This lethargy, this apathy can lead to trouble for even the most successful entrepreneur.
Therefore, it would be a shrewd decision to sit down with both an attorney and an accountant to
discuss the details of the business you plan to start. Consider where you see the business in five
or ten years. Think of all the details life is lived in details: liabilities, taxes, employee benefits,
and the need for investors. Once you can envision the big picture, start making your decision.
Choose the decision that's best for your new business from all aspects.
Remember, your initial choice of a business structure is not set in stone. You can start out as sole
proprietorship or partnership and later, if your business grows or the risk of personal liability
increases, you can convert your business to an LLC or a corporation.
On one final note, not to sound redundant but there are advantages and disadvantages to all
business structures and understanding the complexities in the tax laws relating to each can be
challenging. Before making your decision, be sure to evaluate the pros and cons of each entity
type with a business consultant or CPA to determine which structure makes the most sense for
your business.

Copyright 2012 Mick Spillane

All Rights Reserved