Business Organization Information Center

Choosing the proper business organization structure is one of the most important decisions that a business owner must make. The type of organization will determine how the business handles tax matters and whether there is protection against personal liability. A business owner should consider several factors in choosing a business structure, including the number of individuals in the business, type of business, profitability of the business and insurance. The following overview provides a brief description of some of the more common types of business structures. A corporate and business lawyer at Paul Billings Law in Memphis, TN, can provide you with more information and help you determine which business structure best fits your specific needs.

In a sole proprietorship, a single owner controls all assets used in the business and retains all profits of the business. A sole proprietorship is easy to form, simple to operate and subject to minimal regulation. The IRS considers the sole proprietorship and the owner one legal entity. Therefore, the owner reports all of the business’s profits and debts on his or her own personal tax return. The owner is also fully responsible for any liability that the business may incur. His or her personal assets are not protected from the business’s creditors. Likewise, any of the owner’s personal creditors may pursue the business’s assets in order to satisfy the owner’s personal debt.

A partnership is basically an association of two or more people for the purpose of operating a business for profit. A partnership is classified as either general or limited. To form a general partnership, the parties must simply agree to enter a partnership, either orally or in writing. General partners are subject to personal liability for the debts and obligations of the partnership. General partners are generally entitled to participate fully in the management of the partnership and owe a fiduciary duty to one another. Limited partnerships must be organized under a state law, which may include filing a certificate of a limited partnership with the state. A limited partnership is made up of one or more general partners and one or more limited partners. Limited partners cannot generally exercise much control over the business and their liability is limited to their investment in the business. A registered limited liability partnership (LLP) is a partnership in which partners, with some exceptions, are not liable for damages caused by tortious acts or misconduct by the other partners. Professional partnerships, such as law and accounting firms, often elect to become LLPs because of the additional protections provided by this structure.

A corporation is created by filing the required documents with the appropriate authorities in the state in which the corporation is to be incorporated. By incorporating, a separate legal entity is formed. This separation shields the corporation’s shareholders from liability for debts and other obligations of the corporation. A corporation typically has a board of directors, elected by the shareholders, which oversees the business strategy and dealings of the corporation. The board in turn selects officers to oversee day-to-day management of the corporation. More information about the corporate structure, including the C Corporation, S Corporation and statutory close corporation, is available on the Corporations topic page.

A limited liability company (LLC) is a non-corporate entity. This means the members of an LLC have limited liability for debts and obligations of the company, but it also means they can participate in management of and exercise control over the business. The main purpose of the LLC is to provide individuals with a business entity that avoids some of the complicated regulations of a corporation, but still provides its owners with limited liability. The LLC owners are only liable for the amount that they have invested in the LLC and are not liable for any further liabilities or obligations of the LLC beyond their investment. An LLC is generally taxed like a partnership and does not pay separate federal income taxes.