One of the basic questions that anyone thinking of starting a business should consider matter how small or how large companies can be in the beginning, the question of what legal form their business should take. There are several types of businesses can take it is important to choose what is best for both the business and its owners.

There are of course pros and cons of each potential form and selecting the best image for your company can increase the ultimate profitability of the business for you as the owner while limiting personal responsibility and ask for the company’s debts. Also, if there be more than one owner of the company, there are a potential threat to a company that should be answered before the start of trading, such as questions about what will happen if the owner dies or wants out of the business.

cost and effort of careful planning before starting a business often seems unnecessary cost and disruption of entrepreneurs intent on pursuing their dream business. Yet such planning is essential if the company is going to maximize profits for their owners and survive the possible events that could otherwise bring business to a premature death.

What follows is not meant to be all encompassing discussion of all these pros and cons. Instead, this article is only a short sketch of some key advantages and disadvantages to each form of doing business.

Also, this discussion only deals with a closely held entity and not talk to the peculiar issues publicly traded entities or the various issues securities laws which may occur even in the context of a small, well-organized entity.

Finally, it is important to note that this discussion is based on the Oregon law. Although the law of other countries can often be identical or similar, it is necessary to determine the best form of business entities on the basis of the laws applicable to the anticipated business activities.

Sole proprietorship.

A private company without distinction between business and one of its owner is the easiest form of business to run, at least initially. In private there is no difference between the owner and the business because the owner of the company and, at least to a large extent, the business will be the owner. The private

1. The owner is personally responsible for all obligations and liabilities of the business, and

2. The owner must, in addition to income tax, pay self employment taxes on all business income.

These assumptions generally do private unacceptable form of entity to most people starting a new business, think about how they want to trade.

directory.

A partnership is a business relationship between two or more individuals. Although written partnership agreement is not necessary to create a partnership, so a written agreement defining the appropriate legal beneficiary with respect to each other and co-operation itself is reasonable.

In partnership each partner contributes resources and other values ​​will be the abolition of the partners. In cooperation

1. No member co-owner of the property and only interested partner to transfer or sell the relevant share of the profits and losses of the association and the right partner to receive distributions from the partnership

2. The partnership must keep books and records that are available for review by partners and agents, such as lawyers,

3. What companies have fiduciary duties of loyalty and care partnerships and their partners;

4. A written partnership agreement is for different categories or groups of partners with different powers and responsibilities including different voting rights,

5. All parties are jointly and severally liable for all obligations of the partnership incurred while they are members; and

6. Revenue cooperation is considered to each partner in proportion to their partnership interest for tax purposes and income self employment, whether it is actually received by a partner or not.

Although partners can significantly limit the personal liability of limited participants in the limited partnership, limited partnership must have a general partner is personally liable for the obligations of the association.

Because we have largely defined by agreement of the parties, written partnership agreement is necessary at inception.

Although successful for some business ventures, partnership is often not the best choice of business entities.

Corporations

companies are owned by one or more shareholders to elect one or more directors to oversee management activities Corporation. Companies can be one of the shareholders who is also the sole director and president or can consist of many shareholders elect directors who may have no relationship with the company except for his role as managers supervising officers Corporation which in turn may have limited, if any, capital resources

For the purposes of income tax there are two types of business :. “C” company and “S” corporation. An S corporation must meet the following conditions:

1. Must not more than 100 qualified shareholders (mainly individuals but including certain trusts while excluding nonresident aliens, corporations and partnerships);

2. Have one class of stock; and

3. Do not be disqualified corporation as certain financial institutions, insurance companies and domestic international sales corporations.

For the purposes of the tax, S company is going through a person. The S corporation profits of excess charges Corporation, payroll and other depreciation (including compensation paid to shareholders, employees) is considered to shareholders in proportion to their ownership shares of the personal income tax. An S corporation does not pay income tax itself but it must file an annual tax return.

Profits from the business are attributed to the shareholders of the S corporation if that company has actually paid all or part of the profits to the shareholders of the tax year. Such income thanks to shareholders of S corporations are taxed at ordinary income rates, but is not subject to statutory withholdings.

The C corporation, the corporation has to pay income tax at the corporate level. Shareholders only pay tax on income they receive from the company by way of compensation and dividends. AC corporation will only pay dividends to its shareholders from its profits after taxation. Consequently, dividends C Corporation subject to taxation in both corporate and individual shareholder levels.

as a form of business entity companies (both C and S) have some different benefits including protecting the owners from personal liability for corporate obligations. However, in order to preserve that protection against personal liability, two conditions must be met:

1. The company will be adequately capitalized; and

2. Shareholders shall respect the corporate formalities and respect the company as a legal entity distinct from the private and personal interests.

If shareholders do not meet these conditions it is possible for the court to “pierce the corporate veil” and hold individual shareholders responsible for corporate responsibility.

The closely held company shareholders owe each other and corporate fiduciary duties of loyalty and fair dealing. Shareholders may incur personal liability of infringement of the obligations.

The closely held company more than one shareholder (husband and wife are together one shareholder) it is best to have a written contract that specifies the shareholders rights and obligations to each other and to businesses in terms of their ownership and sale of shares of stock since, for example, the death of a shareholder with no agreement can threaten business viability Corporation but also create problems for the decedent’s estate wants to reduce the value of the shares of the deceased shareholder.

Companies Act

Limited Liability Companies (“LLC’s”) are a relatively new form of party designed to allow owners to contractually define their relationship within the broad legal limits while providing the capital protection against personal liability for the debts of the company. Instead, shareholders or partners, are owners of limited liability companies called “members” and the interest of their own money is called “Membership of interest.” Nature, rights and obligations of the various parties can vary the corporation more than a corporation or partnership.

Instead of statutes governing the operation of the corporation, LLC is controlled by the “Operating Agreement” which defines the rights and obligations of members, managers and companies in relation to the other. While operating agreements intake are valid, they are difficult to enforce if the second dispute in the terms of the oral agreement itself are often mentioned. Absent a management agreement, the state corporation law will provide the terms of the operation of the agreement regardless of what members may have intended or would

There are two types of limited liability companies :. Member managed company and manager managed companies. The member managed LLC all members presumptively shares the responsibility of the company. The manager managed company, parties nominate one or more directors with the power to control the company.

entities and individuals who can not be shareholders in S companies may be members of limited liability companies. Also, unlike S companies that only have one class of stock, the LLC can have many different types of membership interests.

A single member LLC is go through entities such as S corporations for tax purposes. There is one member LLC itself does not pay income tax, although it does file again. All taxable income LLC is thought to be her partner for income tax purposes. Couples who have only Membership in the LLC are considered one entity.

An LLC with more than one person may be taxed either as a partnership or corporation. Unless the company elects to be taxed as a corporation, it will be taxed as a partnership.

As a partnership, income LLC is generally attributed to the members of the personal income tax. As with partners, individuals must usually pay self-employment tax on such income.

The fiduciary duties of members of a company managed corporation are, absent an agreement to the contrary, limited to the duties of loyalty, good faith and fair dealing and care. Under Oregon law duty of care requires only member to refrain from behavior that is grossly negligent or reckless, willful misconduct or knowing violation of the law. A member of the manager managed LLC is not also the manager not owe duties to the company or to other parties only because of their accession.

As a company, LLC must be adequately capitalized and its members and managers must respect it as a separate “legal” to preserve the protection it affords them from personal liability for the debts of the company.

Conclusion

This brief summary of just some of the key items in choosing the right form of business entities. How these and other issues may apply to a particular business depends on the specifics of the company and its owners. The same reasons discussed below as well as other factors bearing on determining the form of entity best suits a particular task should be considered with the advice of both a lawyer and an accountant to get the best results.

© 2010 Lawrence B. Hunt. All rights reserved.