One of the questions people have when starting a business is what legal structure or form should my business take.
There are 3 main types of legal structures namely:
- Sole proprietorships
- Partnerships
-
Corporations
These 3 types are the main ones and come in different variations. These variations come from change in the law to give business owners more flexibility. This article will only discuss the 3 major types. Later on, I will discuss the LLC and the S-Corporation.
In choosing a corporate structure, there are 7 main factors you should consider namely:
- Regulations
- Taxation
- Limited Liability
- Continuity
- Transfer of Ownership
- Management Structure
-
Ability to Raise Capital
| Factor | Sole Proprietor | Partnership | Corporation |
| Regulation | Registration is required if you plan to have an assumed business name or have employees. | Registration is required if you plan to have an assumed business name or have employees | Most regulated form of doing business. Regulated by state laws and public corporations are regulated by the SEC |
| Taxation | Pays self-employment tax and income tax on all income | Pays self-employment tax on income from services performed. Distributive shares of limited partners are not subject to the SE tax. | Pays corporate taxes separate from its owner. However, shareholders are required to pay taxes on dividends. Since this income has been taxed once at the corporate level- corporations are said to be double taxed |
| Limited Liability | The owner and business are considered one entity. No limited liability | Partners are personal liable for actions they take in their name of the companies. Partners are not only liable for their own actions but also by those taken by other partners. However, limited partners have limited liabilities. | Corporate owners enjoy limited liability |
| Continuity | Business ends with the death or resignation of the owner | Partnership ends with termination of partners | The corporation can choose to go on after the death of resignation of a shareholder |
| Transfer of Ownership | The owner could sell the assets of the business. The buyer becomes the new owner of the business and becomes fully responsible for managing it | Partners can sell their interests in a partnership | Easiest form of business to transfer ownership. The shareholder simply sells his or her shares |
| Management Structure | Managed by owner | Managed by general partners | Corporations have 3 tiers of management: The shareholders/ owners, the board of directors and professional executives. A shareholder who owns 100% of the share could wear all 3 hats or choose elect board of directions and hire corporate executives. |
| Ability to Raise Capital | From owner, friends and family. More successful sole proprietors might be able to get a loan from the bank | Capital mainly from partners. Might qualify for bank loan |
Corporate ownership can be transferred through a stock certificate. Has the ability to raise huge amount of capital by issuing shares. |