Business Ownership: Everything You Need to Know
The form of business ownership you choose determines the type of business registration procedure that you need to follow.5 min read
2. Partnership: General vs. Limited
5. Nonprofit Organization
Business Ownership: Everything You Need to Know
The form of business ownership you choose determines which business registration procedure that you need to follow. While registering a sole proprietorship can be less expensive and more straightforward, owning a corporation or LLC may make more sense. LLCs, also referred to as limited liability companies, are the most attractive type of business ownership as all owners have limited liability and cannot incur additional liability based on the business’s liability and debts.
Partnership: General vs. Limited
There are two kinds of partnerships, which include general and limited partnerships. There are similarities and differences between the two, but keep in mind that each type of partnership is treated differently in terms of financial responsible. Therefore, when choosing the type of business owner you want to be, you’ll want to pay close attention to the personal liability you may face for any debts or obligations of the company itself.
A general partnership is created by two individuals who will both be 100% liable for any losses suffered by the partnership. Therefore, if one partner causes the company a significant financial loss, both partners can and will be held financially responsible for the company’s loss. This means that both partners’ personal assets can be affected by such a loss. Before you choose to create a general partnership with someone, you’ll want to be sure that you can trust this person, both personally and professionally.
A general partner is part owner of a partnership. Usually, a general partner is either a managing partner or active in the daily operations of the company. A general partner of a business can act on behalf of the company. While a general partner has significant duties and responsibilities in the partnership, he or she also has unlimited liability in terms of a partnership’s financial dealings. Therefore, if the partnership incurs significant financial debt or liability, such liability can pass through to the general partner(s). However, if the business operates as a limited partnership, only one of the owners will be deemed a general partner, and thus have unlimited liability.
Limited partnerships, also referred to as limited liability partnerships, (LLPS), are business structures set up by two individuals who work together as limited partners. As its name implies, these partners will have limited financial responsibility. Therefore, they will only be financially responsible for loss equating to the amount of money they initially put in to create the company. When it comes to decision-making, the partners will both have an equal say in the structure and operations of the company. In this sense, the limited partners have general partnership qualities; the only additional benefit here is that they are only held responsible for a limited amount of money and need not worry if the other partner suffers a loss that affects the company.
A limited partner, also referred to as a silent partner, has limited liability for the business’s debts and liabilities. Unlike a general partner, the amount of liability that a limited partner assumes is based on the amount of capital he or she contributes to the business. In addition to having limited liability, the limited partner also has limited responsibilities in terms of the daily operations of the business. Such limitations depend on the number of shares the limited partner owns. Generally, limited partners aren’t involved in the daily operations of the business nor do they participate in management meetings.
An LLC, or a limited liability company, provides that the owner or member cannot be held personally liable for the financial losses sustained by the company. This makes the creation and ownership of a LLC quite attractive. Some additional benefits of owning an LLC include the fact that you can increase your customer base if you create an LLC as opposed to selling your services or products out of your home with no official business name to your product or services. Having an LLC will also help you obtain financial assistance if your company suddenly expands and you need help having your product manufactured or need to hire an employee to help you sell your services.
LLCs are formed under state laws - which vary state by state - when an individual files the Articles of Organization with the Secretary of State’s office in the state you choose to register. A name availability check can be conducted on the Secretary of State’s website in order to ensure that the name is not currently being used. An LLC business owner is required to report any changes in address, membership, or service and must also file an annual report that includes important business and financial information.
A corporation operates under its respective state laws, and is generally treated as an individual. The reason for this is being the corporation can sue others and, alternatively, be sued. It can also buy and sell property as an actual corporation.
There are two main types of corporations—S corporations and C corporations. S corporations are referred to as pass-through tax entities due to the fact that the tax implications are passed through to the owners and members. Therefore, they are financially responsible for any leftover profits of the corporation after it is taxed. However, unlike the S corporation, the C corporation does not pass-through to the owners or members. Instead, owners and members of a C corporation are only responsible for the income they make, and are not taxed on the profits left over after the C corporation profits are taxed. The tax implications are the main difference between these two types of corporations, so you’ll want to keep that in mind when determining which type of corporation you wish to operate.
A nonprofit organization is created with a mission to accomplish a non-profit type of goal in order to better serve the interests of the public. It is generally created to enhance a social cause, which can be anything from serving the needs of the overall public, helping those in need (i.e. the homeless), helping the animal population, assisting those with mental disabilities, or helping grow and expand the infrastructure within a particular area. The possibilities are endless in terms of creating a nonprofit. But remember that, generally, no one can financially benefit from the nonprofit, unless the funds are going to the industry in which the nonprofit was created to begin with.
A cooperative, also referred to as co-op, is an association of volunteers who meet with one another in order to accomplish a common goal. This can be a group organized for an apartment complex, nonprofit, credit unions, and several other types of organizations that are owned and controlled by the members, all of whom share limited liability.
A syndicate is a self-organizing group of people or businesses that form together to transact specific business or to promote a common interest.
There are three major types of franchises, including business format, product format, and manufacturing format. A franchise agreement can have many benefits for the franchisor as well as the franchisee. However, there are also disadvantages to such an agreement. Before choosing to enter into a franchise agreement, it is best to learn the pros and cons of franchising so that you can determine if ownership a franchise is right for you.
If you need help choosing a what type of business ownership you’d like to be or need help determining what type of business structure to operate, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.