Business Structures

Legal Business Structures

Registration

  • Registering your business is a legal requirement to inform the government of your existence.
  • This allows you to obtain necessary licenses and permits, and to pay taxes.
  • Registration provides legal and financial protection, including liability and potential tax benefits.

Sole Proprietorship

  • Owned and run by one person.
  • Simplest form; providing a service/product alone without registering defaults to this.
  • Drawbacks:
    • No legal separation between you and your business, leading to personal liability.
    • Difficult to raise investment as you can't sell stock.
    • Banks may hesitate to lend money.
  • Taxes:
    • Pass-through status: profits are part of personal taxes.
    • Subject to self-employment taxes.
    • Business expenses can be tax write-offs.

Partnership

  • Two or more people share business ownership.
  • Three types:
    • General: Shared personal liability and equal decision-making.
    • Limited: One partner has unlimited liability and runs the business; others have limited input and liability.
    • Limited Liability (LLP): All partners have limited liability.
  • Easier to raise money compared to sole proprietorships.
  • Taxes: General partners have pass-through status and split profits, dealing with their own taxes, including self-employment taxes.
  • LPs and LLPs are more expensive due to legal and accounting needs.

Corporation (C-Corp)

  • Separate legal entity from its owners with its own profits, taxes, and liabilities.
  • Offers limited liability, protecting owners from lawsuits.
  • Easier to raise funding by selling stock.
  • Requires extensive paperwork, record-keeping, and annual reports.
  • Expensive to form.
  • Subject to double taxation: the corporation pays taxes on profits, and stockholders pay taxes on dividends.
  • Decisions are driven by profit for stockholders.

Benefit Corporation (B-Corp)

  • Focuses on social good alongside profit (e.g., Patagonia, Ben & Jerry’s).
  • Offers limited liability.
  • Empowers decision-making for social good, even if less profitable.
  • Similar funding and structure to C-corps, with potential for impact investing.
  • Taxed like C-corps.
  • Requires additional reports for transparency and accountability.

Limited Liability Company (LLC)

  • Hybrid of corporation and partnership with one or more owners.
  • Offers limited liability and flexibility.
  • Can later transform into a corporation.
  • May attract investors due to the potential to become a corporation and sell stock.
  • Taxes: Pass-through status, but owners pay self-employment taxes.
  • Reformation may be required when an owner joins or leaves unless a legal agreement covers ownership transfers.

Cooperative (Co-op)

  • Owned by the people using it; an elected board manages it.
  • Stockholders have a voice through voting, with each owner having one vote.
  • Limited liability for owners.
  • Slower response to market changes due to democratic decision-making.
  • Profits are distributed among stockholders.
  • May face difficulty getting outside investment.
  • Subject to double taxation.

Nonprofit Corporation

  • Created for charity, education, religious, literary, or scientific work and is tax-exempt.
  • Extensive paperwork, record-keeping, and annual reports are required.
  • Owners have limited liability.
  • Exempt from state and federal taxes after IRS approval.
  • Strict rules on profit usage; cannot be distributed to stockholders or political campaigns.
  • Eligible for grants, and can receive donations.

Federal Requirements (US)

  • Obtain an Employer Identification Number (EIN) from the federal government for taxes and banking.
  • Register your business through the Secretary of State’s website.
  • Comply with local government requirements, such as obtaining a business license.
  • Review state and federal tax reporting requirements.