A primer on the different business structures and their benefitsJanuary 28, 2017
Entrepreneurs should understand the distinctions between partnerships, corporations and LLCs, along with the benefits of each business structure.
Choosing a legal business structure can be one of the most influential decisions that a business owner or entrepreneur makes. In Massachusetts, the type of entity that a person chooses can have wide-ranging impacts, including determining her or his tax burden, liability for business losses and responsibilities within the organization. This makes it critical for anyone forming a business to understand the potential advantages and downsides of the most widely used business structures.
A sole proprietorship is an unincorporated business that one individual runs. Legally, the individual is not distinguishable from the business. He or she keeps all profits and is responsible for all losses and tax liability. Forming a sole proprietorship is fairly easy, since this status is automatically conferred when a person begins engaging in business as a sole owner. This option may be advisable when a simple and efficient route to business formation is desirable.
In a partnership, two or more people share ownership of the business, along with the associated profits and losses. Compared to more complex business entities, a partnership can be formed relatively quickly and inexpensively. Taxation is also simpler; although a partnership must report income information yearly, it does not directly pay income taxes. Instead, profits and losses "pass through" to members. This efficiency may benefit emerging small businesses.
A joint venture, which is a subtype of partnership, is a temporary arrangement that lets partners pool their resources to achieve a specific objective. A joint venture is treated as separate from each partner's other businesses, and it only lasts for a defined amount of time. A joint venture may be an advisable option for individuals or entities that need additional resources, yet want flexibility and are not interested in forging long-term partnerships.
A corporation is a legal entity that has specific rights and responsibilities, and is considered separate from its owners. A corporation offers its shareholders limited liability; they can invest in and profit from the business, but they cannot be held financially liable for its losses. Since corporations must maintain compliance with complex laws and tax requirements, and since they must pay significant fees, this structure is usually most suitable for large, established businesses.
An LLC, or limited liability company, offers many of the benefits of a corporation as well as a partnership. Like corporations, LLCs protect their members from personal liability if the actions of the company result in lawsuits or debt. However, they also share some attributes of partnerships, including:
· Providing lower incorporation-related costs
· Reducing the amount of paperwork and record-keeping that members must do
· Avoiding "double taxation" by passing profits and losses through to members
This business structure gives members greater power to decide how they will share profits, responsibilities and liabilities, since these roles can be defined in the entity's business operating agreement. This makes an LLC a fitting option for people who want more flexibility in choosing how to operate their business.
Assessing the options
Often, the most advantageous legal structure for a business depends on many factors, including the nature of the business, the industry, potential risks and liabilities, projected growth and long-term objectives. To fully understand the benefits and drawbacks of each option, stakeholders should consider seeking the advice of an attorney who can offer insights and guidance during the process of business entity formation.