Corporate structures to decide from for First-Time Business Owners
The U.S Economy is booming again. One of the factors that contribute to this growth is the rise of domestic business investment which is increasing take home pay. This domestic investment, mostly from private companies, exceeds government consumption and expenditures for the first time since the start of data collection (1947). Investment, existing and new companies, is moving to a more efficient form than it has been. This trend will most likely give the economy a better outlook and shape.
In the United States, business enterprises are usually in forms of Limited Liability Company, sole proprietorship, corporation, and etc. Each has advantages and disadvantages when it comes to business structures and how they operate.
In order to increase growth effectively, let us learn what business form fits your company, for you as a business owner what setup is perfect for you, and how to organize your business that will surely increase growth.
Limited Liability Company (LLC)
LLC is the newest form of business organization in America. Often described as a hybrid business form, it offers the company owners protections from debts and liabilities.
The basic principles of corporate law in America have not significantly changed since no matter how many times we flipped it, a corporation is still a corporation. The burden of the upper administration will still be carried over to the lower management.
Considering that LLC is a new form of business, no legal precedent has been developed to guide owners, managers, and professionals. It will take time for a reliable law for LLC to pass. In effect, company owners and employees may face issues in their operations if not legally guided. Small businesses will have little or no problem with it. However, for new businesses that involve in shareholding and venture capital, this business form is not for you. Publicly-held companies could be a better alternative instead.
Despite that, LLC’s old system has been addressed. Currently, the burdensome formalities like annual meetings are not strictly required anymore. Company owners are still protected from debts and liability. The LLC best works for small businesses.
Derived from the Latin word corpus which means body, it is a term legally accepted in the eyes of law as a single person despite that it is composed of individuals. Compared with the LLC, the Corporation form of business has the power to protect its owners from personal debts and company’s liability.
Corporations are composed of stakeholders, directors, managers, officers and Intellectual Property Rights lawyer. Unlike the LLC, corporations need to meet the formalities and quorum requirement and it should be properly followed and observed. Aside from the protection given to the owners, there is a reliable body for legal procedures to give guidance to the managers and owners.
Because corporations are legally accepted in the eyes of law, it is commonly used by public companies where security is assured. Transfer of ownership can be done in this business form through the transfer of securities. One of the greatest benefits being a corporation is its unlimited life.
Aside from the formalities that need to be followed and observed, the state requires the corporation of annual fees and periodic filings. In contrast, because of the formalities involved, building corporations require significant capital investment compared with other business forms like partnerships and sole proprietorship.
Among the two business forms mentioned above, Sole proprietorship is the simplest business form. Although not a legal entity like Limited Liability Company, it simply refers to a single individual who owns a business. It also means that all the responsibility for debts should be taken care of the person who owns the business.
Since the owner is not distinct from the business itself, potential disadvantages of this business include the owner’s personal responsibility for the debts, downfall of the business, losses and other liabilities.
Due to its simplicity, easy setup, and low cost for construction, anyone can easily enter the market through sole proprietorships. There are minimal formalities in this form of business. It is also possible for the owner to mix business with his or her personal assets. The owner can do whatever he or she may wish. Aside from that, the owner has no obligation to pay unemployment tax since the owner and the business are not a separate entity.
For self-employed individuals, this business form is perfect for you. However, this business form has disadvantages too. Since the owner is not separate from the business, the owner is also liable for all the debts, losses, and other liabilities of the business. This business form also prohibits the owner to raise capital. Lastly, the survival rate of sole proprietorships is short.
Partnership is unique when compared with other business forms mentioned above. Partnership alone has three forms: General Partnership, Limited Partnership, and Joint Venture. This form of business is an expanded version of a sole proprietorship. This works best for business owners who formally agree to do business together as business partners.
In general partnership, all parties that are involved are treated as equal in terms of the distribution of profits, liabilities, and corresponding duties.
Limited partnership, on the other hand, works best for the investor role kind of partnership. Business owners frequently use this because of its complex structure.
Lastly, for a Joint Venture is the ideal partnership for a one-time and specific project.
It would be helpful to take note of the following when one wants to use partnership as a business structure:
Partnership agreement – settle first the partnership agreement to have a clear picture of you will you working with, what part should you be working on, and the time frame of the project. Tax entities – in partnership, each partner has a fair share of income, loss, and tax return. For added expenses, a help coming from a legal guidance is ideal too to further check the partnership agreement.
Find a partner you can trust – in doing business with your partner, trust is a crucial part. To avoid conflicts in the future, never skip the partnership agreement part.
In choosing the right business structure for you, make sure the level of your involvement.
You can expect more growth when it comes to these types of domestic business investments. Not only will there be growth in business enterprises, you can also expect an increase in employment as well as the take home pay.
More entrepreneurs will be motivated and encouraged to push their businesses forward if this trend continues for the next years, and surely, it will.
If you are a business person, then this is the time to finally make your dream into reality by putting up your own company. With the right mindset, the right products, good timing, and with a little bit of luck, your business will surely bloom.
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Written by: Beatrice Santos is taking up units in business law and currently affiliated as an intern in a local law firm. She is passionate in helping those who have any queries regarding business laws and how these may affect their respective businesses. You can visit Carson Law Firm for more information.