Legal Forms of Business
In order to structure your business the right way, you will need to know the legal forms of business organization.
Even if you have some other business in mind as your reason for researching legal forms of business organization, you are in the right place.
One of the first things you need to start thinking about on your journey to structuring your business is which of the five legal forms of business organization is best for you and your business.
In this article, we will discuss in detail the most common types of legal forms of business. We will also look at the advantages and disadvantages of each.
Finally, I will share my opinion on the business structures that I think are best for starting your business and recommend where you can get your business formation done hassle-free.
5 Legal Forms Of Business Organization
- Sole proprietorship
- S Corporation
- Limited Liability Company
1st Legal Form Of Business: Sole Proprietorship
According to the state of Georgia, a sole proprietorship…
“is not a legal business entity. The sole proprietorship is a one-person business that is not considered to be a distinct entity from the person who owns it, and it is frequently operated using the owner’s personal name.”
The sole proprietorship is by far the easiest. And in many states, you don’t even need a business license. There is no additional tax reporting other than your personal taxes.
Sole Proprietorship Form of Business Organization: Advantages and Disadvantages
It’s easy. Little documentation is needed- making this very flexible. You are able to commingle personal funds and money made via the business activity.
There is NO protection for you. If something happens and you are sued as a result of your business, they sue you personally.
2nd Legal Form Of Business: Partnership
According to SCORE, a partnership form of business organization…
“is a business shared by multiple owners. It’s not a legal business entity, and it doesn’t have to be registered with the state. Basically, if you decided to go into business with another person without filing any state paperwork, you’re automatically in a partnership.”
Much like the sole proprietorship, the partnership is simple. As per the IRS,
“a partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” profits or losses to its partners. Each partner reports their share of the partnership’s income or loss on their personal tax return.”
Partnership Form of Business Organization Advantages and Disadvantages
Again, it’s easy. There is not a lot of documentation. Because the partnership is more of a passthrough, in the same way, that a sole proprietorship uses the personal income tax forms to report earrings so does a partnership. Each partner claims their earrings on their personal income taxes.
You can still be personally sued. In addition, you can be held accountable for your partner’s actions or lack thereof.
**There are other types of partnerships that offer some protection, but I will not go into that. If you are interested in forming a partnership, you can research more in-depth over at the IRS website.
3rd/4th Legal Form Of Business: Corporation and S Corporation
Ok! This can get complicated. I will do my best to explain at a basic level.
However, read the article I did on How to Start a School here to learn more about the types of people you should have on your advisory board starting out.
They can be a wealth of information and possibly even save you money by completing your business structure for you.
A corporation is a legal entity. It stands on its own, separate from its owners.
Because of this, a corporation is the strongest way to keep you from being held responsible or liable for the actions and finances of the business.
If you are going to be a nonprofit and you want the benefit of being tax-exempt, you will have to form a corporation and complete the paperwork for 501c3 status.
The S corporation in short is simply a way of forming a business so that it pays fewer taxes. Not every business qualifies for this type of entity.
I am almost 100% sure you don’t need this, at least not right now. Therefore, I will not even go into the advantages and disadvantages.
However, just to give you a heads up, if you start making over $40K then you should think about forming an S corporation.
Corporation Form of Business Organization Advantages and Disadvantages
Advantages of a Corporation
Corporations offer the strongest protection to those who own them from personal liability.
Disadvantages of a Corporation
It cost more to form this structure. There is more paperwork involved.
5th Legal Form Of Business Limited Liability Company
Lastly, you have for your consideration a Limited Liability Company. This is a type of business structure that is also referred to as an LLC and is very common in the US. In simple terms, it’s a combination between a corporation and a partnership.
It has the same features as a corporation in that it provides the owner(s) with limited liability protection. Meaning, you can keep some distance between yourself and the business. It’s like a corporation in that it pass-through its profits so that owner(s) are taxed as part of their personal taxes.
Limited Liability Company Form of Business Organization Advantages and Disadvantages
It offers liability protection; it allows you to “pass-through” your earrings and it doesn’t cost too much to develop.
Well, I can’t think of any!
Common Legal Forms Of Business Organization
You know the teacher in me wanted to teach. LOL! I do feel you need to know all your options before you select one.
However, you most likely will either structure your school as a sole proprietorship (I don’t recommend it), a limited liability company, or a corporation.
Each of these has its own distinct advantages and disadvantages as you have learned above.
You should select the one that best fits what you and your business need. Think about how your school will show up to serve.
Triumph School, my school, was structured as a corporation with the appropriate paperwork completed for us to receive our 501c3 status so that we are taxed-exempted.
This means in some cases, we are tax-free. We don’t pay taxes.
This has been a huge help to us. On the flip side, we still have to file IRS form 990, an annual information return.
Make Your Business Offical
I hope you are now well informed. If you are, I want to help you take the next step and make your business official. It’s time to register with your state.
This process may look different in each state; however, if you need help I suggest using Incfile to get you set up. It’s easy and stress-free. Did I mention it’s extremely affordable?
They will take care of everything needed for your business formation so that you can focus on running your business.
Wrap-Up- Legal Forms Of Business Organization
In this article, we discussed the 5 common types of business structures. We also identified the 3 legal forms of business organization most commonly used in the United States.
They each have their advantages and disadvantages.
Your goal now is to select the one that best fits you and your business where you are.
If you are interested in starting a micro-school, then you are ready to take these 5 steps that will position you to be able to run a successful small school.
Before you start spending money on your online presence, be sure to read my article, School Branding for Micro Schools.
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If you are new here, my name is Cindy Lumpkin. I am a special education teacher who started her own school and created a new set of options for myself.
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