Guide: Start a Business  Part Five

Forms of Business Organization

One of the first decisions that you’ll have to make as a business owners is how your business should be structured. You need to know the advantages and disadvantages of each of the different forms of business organization to make sure you’re making the right decision for your new business.

All businesses must adopt some legal configuration that defines the rights and liabilities of participants in the business’s ownership, control, personal liability, lifespan and financial structure. The form of business determines which income tax return form to file and the company’s and owners legal liabilities.

This is a big decision that has long-term implications, so if you’re unsure of which form of business is best for your company, you’ll want to consult a professional. Luckily, there are several business counselors and centers across Missouri offering free assistance in forming a business that are knowledgeable and ready to help.

When you’re forming your new business, you will want to take into account the following:

• Your (practical) vision regarding the size and nature of your business.
• The level of control you wish to have.
• The level of “structure” you are willing to deal with.
• The business’s vulnerability to lawsuits.
• Tax implications of the different organizational structures.
• Expected profit (or loss) of the business.

>> Need a little help? Fill out our help form so we can assist you in coming up with a plan that is personalized for your business and life. Bonus: our services are always free.

Now let’s dig into the different forms of business organization.

Sole proprietorship

The vast majority of small businesses start out as sole proprietorships. These businesses are owned by one person, usually, the individual who has day-to-day responsibility for running the business. Sole proprietors can be independent contractors, freelancers or home-based businesses.

Sole proprietorship advantages

• Owner receives all the profits
• Profits are taxed only once
• Owner makes all decisions and is in complete control of the company (could also be a disadvantage)
• Easiest and least expensive form of ownership to organize

Sole proprietorship disadvantages

• Unlimited liability if anything happens in the business. Your personal assets are at risk (including your home in Missouri)
• Limited in raising funds and may have to acquire consumer loans
• No separate legal status

Tip: When looking at setting up a sole proprietorship, assess what type of liability you have. If you’re selling advice or services, you may need an errors and omissions insurance policy to cover yourself against claims for negligence. Determine what you have to lose. Do you own a home or savings account? Your personal assets could be at risk in the case of a lawsuit.

Partnerships

In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out or what steps will be taken to dissolve the partnership when needed

Disclaimer: If you’re establishing a partnership, it is extremely important to make sure everything is outlined in case things go sour, especially in the case of starting a business with a loved one or friend. Seek legal advice to create a partnership operating agreement to hash out all business decision possibilities including succession or exit plans. There are several legal services in Missouri ready to assist you every step of the way.

Partnership advantages 

• Easy to establish (with the exception of developing a partnership agreement)
• Separate legal status to give liability protection
• Profits taxed only once
• Partners may have complementary skills

Partnership disadvantages

• Partners are jointly and individually liable for the actions of the other partners
• Profits must be shared with the partners
• Divided decision making
• Business can suffer if the detailed partnership agreement is not in place

Corporations

A corporation is considered by law to be a unique entity, separate from those who own it. A corporation can be taxed, sued and enter into contractual agreements. The corporation has a life of its own and does not dissolve when ownership changes.

There are three types of corporations: C-corporation, S-corporation and Limited Liability Company.

C-corporation

A C-corporation is a corporation that is taxed separately from its owners. It gives the owners limited liability encouraging more risk-taking and potential investment.

C-corporation advantages

• Limited liability
• Transfer of ownership, shareholders can sell their shares
• Capital is easier to raise through the sale of stock
• Company paid fringe benefits
• Tax benefits

C-corporation disadvantages

Double taxation (corporation and shareholder earnings taxed)

Can be costly to form

More administrative duties - required by law to have annual meetings, notify stockholders of the meeting, must keep minutes of meetings and turn in

Pay corporate taxes at a different time than other forms of business

S-Corporation

An s corporation also known as subchapter S-corporation offers limited liability to the owners. S-corporations do not pay income taxes rather the earnings and profits are treated as distributions. The shareholders must report their income on their individual income tax returns.

S-Corporation advantages

• Limited liability
• Avoids double taxation
• Profits taxed only once
• Capital is easier to raise through the sale of stock
• Transfer of ownership

S-Corporation disadvantages

• Can be costly to form
• Stockholders limited to individuals, estates or trustees
• Required administrative duties
• Cannot provide company paid fringe benefits
• Stockholders are limited to citizens or resident aliens of the United States
  
  

Limited Liability Company

A limited liability company or LLC is a hybrid business structure that provides the limited legal liability of a corporation and the operational flexibility of a partnership or sole proprietorship. However, the formation is more complex and formal than that of a general partnership.

Tip: Forming an LLC requires the business owner to file legal paperwork. You may want to consult an attorney to assist you with the process. Here is a list of service providers in Missouri that provide legal assistance.

Limited liability company advantages

• Most common business structure and specifically created for small businesses
• Must have insurance in case of a suit
• Separate legal entity
• Usually taxed as a sole proprietorship
• Unlimited number of owners

Limited liability company disadvantages

• Can be costly to form
• Yearly administrative costs
• Personal tax liability
• Legal and accounting assistance is recommended

Who can help?

Many business-building organizations in Missouri offer legal services to help you through these beginning stages of launching your business. Start with this list or pop over to The Resource Navigator to filter this list by your location, industry and more.

Remember if you need help, give us a call at 866-870-6500 or send us a message. We can guide you through the next steps you need to take to start your business.