The Basics of Risks Involved Depending on Business Legal Structure
Business Models & Organizational Structure
By Jeffrey Joyner
Advantages Vs. Disadvantages of Forms of Private Business Ownership
The Advantages of a 1099 vs. Sole Proprietorship
The Advantages of Business Organizations
What Types of Business Organizations Are Owned by the Stockholders?
Partnership Vs Corporation
Businesses fall under four general legal structures, with some division within them: Sole proprietorships, partnerships, corporations and limited liability companies. These distinctions provide differences in organization, tax structure and legal liabilities. New businesses must choose their legal structure carefully, as category has its own associated legal risks for owners and investors.
Sole Proprietorships
Sole proprietorships are owned and operated by an individual who assumes all responsibility and risk for the business. These types of businesses are the easiest to form and operate, because they are based only on the individual owner. While the owner receives all profits from the business, the owner also is responsible for all debts, losses and liabilities associated with the business. Personal assets can be included in these business obligations.
There are two types of partnerships in terms of liability, general and limited. Both are business agreements formed by two or more people who agree to share some or all of the business's legal liability. In a general partnership, all partners are equally liable for any debt, losses or claims made against the business. Personal assets are at risk in this type of partnership, even for claims and decisions made by another partner. Limited partnerships are more complex and carry fewer liability risks for investors, but at least one partner must still be personally liable for all claims. Limited liability partnerships limit the risks for some owners and work similarly to limited liability companies for removing personal assets from risk.
There are many types of corporations, including S Corporations and nonprofits, but the differences among them are primarily related to tax structures and filing requirements. In matters of liability, corporations are similar. They are more complex and expensive to form and maintain, but corporations offer protection to the personal assets of its owners, the shareholders, so that they cannot be levied against the company's debts. The corporation is considered an independent legal entity and thus is liable for all its own losses, debts and claims.
Limited liability companies, or LLCs, are a popular type of hybrid business structure that provides some of the ease of formation of sole proprietorships and partnerships, combined with the liability protection of corporations. As the name implies, LLCs confer limited liability status to owners. This is not a shield against wrongful acts made by the company or its employees, but it does usually exempt personal assets from being accessible to pay debts or lawsuits.
Small Business Administration: Sole Proprietorship
Montana Secretary of State: Business Models and Organizational Structures
Small Business Administration: Partnership
Small Business Administration: Corporation
Small Business Administration: Limited Liability Company (LLC)
Jeffrey Joyner has had numerous articles published on the Internet covering a wide range of topics. He studied electrical engineering after a tour of duty in the military, then became a freelance computer programmer for several years before settling on a career as a writer.
The Advantages of a LLP Over a LLC
About Business Organizational Structure
The Disadvantage of a Sole Proprietorship and a Partnership Is Unlimited Liability
What Are the Different Structures for Building a Business?
The Difference Between a Corporation & a Company
Disadvantages of Taxation for the Entrepreneur
Types of Organizational Structure in Business
Pros & Cons of a Limited Liability Corporation
Types of Businesses That May Be Formed
1 The Advantages of a LLP Over a LLC
2 About Business Organizational Structure
3 The Disadvantage of a Sole Proprietorship and a Partnership Is Unlimited Liability
4 What Are the Different Structures for Building a Business?