Tuesday, January 19, 2010

Legal Business Entities

Are you putting together a new concessions business? If so, have you chosen the best legal structure for your new company? Have you gotten that far yet? If not, here is a great breakdown of the legal business entities available in the US today. This list has been compiled by SCORE.

We hope that you will find the descriptions of these business entities helpful as you move forward in forming your new business.

Types of Legal Entities

Choosing the legal structure of your business is an important first step to beginning operations. Different business entities offer different levels of protection, control and potential tax savings. Here are some of the most common types of business organizations:

Sole Proprietorships
A sole proprietorship is created by default–if you begin business operations solo, without forming a specific organization, you’re a sole proprietor. Sole proprietorships have the least amount of liability protection for the business owner. If your company is sued or pursued for unpaid debt, creditors can seize your personal assets as repayment. Sole proprietors pay tax on business income on their personal income tax returns–the business does not pay its own taxes.

Partnerships are similar to Sole Proprietorships in that income “passes through” the business to be taxed at a personal level. Partnerships can offer some liability protection if they are structured as limited liability partnerships. A partnership can allocate profits and losses among the partners as it sees fit–usually specified in the partnership agreement. Partnerships can also be “formed” very informally in some cases, without filing any legal documents.

Most for-profit companies operate as C-Corporations. The owners of a C-Corporation, called shareholders, are taxed twice–once at the corporate level (the corporation files its own tax return) and once at the personal level on income received from the company. C-Corporations offer heightened protection for owners and allow a more formal, defined structure for business owners–you’re required to file articles of incorporation, hold annual meetings and meet other requirements, depending on which state you choose to incorporate in.

S-Corporations also provide personal liability protection against business debts. S-Corporations are similar to C-Corporations in many respects–there are certain requirements for formation and operation and the corporation is its own legal entity–but income “passes through” the corporation to shareholders, similar to taxation at the Partnership or Sole Proprietorship level. An S-Corporation offers many of the benefits of incorporation without exposing the shareholders to the double taxation a C-Corporation requires.

A Limited Liability Company (LLC) is a hybrid entity that has some characteristics of a corporation. Rules for LLCs are usually determined at the state level and can vary depending on which state you form your business in. LLCs have fewer ownership restrictions than corporations and more flexible management structures, but allow owners fewer options when it comes to raising capital for business operations or finding investors.

No matter which type of business organization you choose to form, make sure you consider all of your options before making a decision. It’s a good idea to consult with an attorney, so you can fully understand the benefits and drawbacks to each type of entity.

SCORE, the “Counselors of America’s Small Business Owners” is a national association dedicated to helping small business owners form and grow their businesses. Headquartered in Herndon, Virginia and Washington D.C., SCORE has 364 chapters in the United States as well as in U.S territories. SCORE is a partner of the U.S. Small Business Administration (SBA).

No comments: