One of the first decisions any business operator must make is determining the type of business entity they need for their company. Some companies are owned solely by one individual or a married couple, while others are partnerships of some form. Each business entity type carries its own responsibilities and requirements, and issues such as legal licensing and distribution of income should be addressed upfront. Taxation is a major issue for all businesses, and tax avoidance is crucial for most operators. Taxes and distribution of income are actually central to the type of business entity chosen, and it always takes an experienced business law professional to help advise and finalize all legal business form requirements.
The simplest form of business structure is the sole proprietorship. This is a business structure where one individual owns the company and all income is considered the property of the owner. There is no pass-through structure as with a limited liability company, also known as an LLC. The owner assumes all responsibilities associated with the company and controls all assets accrued in conducting business, including financial in-flows.
Limited liability company
An LLC is actually a form of partnership where income passes through to each individual with respect to earnings determined by the percentage of ownership. The LLC itself does not pay taxes as a business law requirement. Instead, the tax burdens are assigned to each partner with respect to specific work performed according to the company organization contract.
Partnerships can be the most detail-driven company organization type because all partners do not necessarily own equal shares in the business. They can be both general or limited, known as GP or LP entities. A dual ownership GP is where both partners own 50% of the business with an LP being an unequal ownership share.
Some businesses of significant size will want to establish the operation as a type of corporation, which carries a more detailed business law application with respect to reporting to stockholders and tax responsibilities. Both the employees of the corporation and the corporation itself will have tax liabilities regardless of whether it is a “C” or “S” corporation type.