Business Structures: The Basics

What is the first thing you should do when you start a new business? Should you tell all of your friends? Should you hire a marketing expert? Should you start advertising? Should you hire an accountant?

We want to discuss something very important to any business owner or early stage entrepreneur: the importance of legally registering and protecting your business.

Before you get your business up and running, you should consider what type of legal entity your business will be registered as. This will have direct and tangible implications, including tax, ownership, rights, risk, and liability. The most common types of business ownership are sole proprietorship, partnership, and corporation.

A sole proprietorship is a simple structure for those who wish to own and operate their business solo. The main benefit is the tax advantage; your business expenses can be stated on your personal income tax return. However, the main disadvantage is that you will be personally liable for risks, which means that your personal assets may be seized to recover claims.

A partnership may be registered as either general or limited, and it involves more than one owner. Partners enjoy the advantage of reporting profits and losses on their own individual personal income tax return, as the business itself does not get taxed. The risk of a general partnership is that the obligations and liabilities of each partner are binding toward all partners.

A corporation is a legal entity that is established separately from its owners. A corporation can take on liabilities and risks that are not transferred to the owners, and it can raise funds by selling shares to shareholders. The profits of the corporation do not automatically pass through to the owner(s), meaning that the income of the corporation is filed separately from the income of the owners. The corporation is taxed on the profit it possesses, but if it that profit is distributed to its owners or shareholders, personal income tax will be applied and must be paid by those parties.

Setting up a corporation or a partnership is more complex and expensive than a sole proprietorship, but it may be necessary and more beneficial for you and your business in the long term. This post provides the most basic and common information about these business structure types, but it should not be taken as professional legal advice. We highly recommend that you work with an experienced professional with trained legal expertise when making decisions that will have important and longstanding consequences on your business.

Burris Law business attorneys are a mom and pop family business, owned by husband and wife duo Ariana Burris JD and Jason Burris JD. The firm was recognized in 2018 and 2019 as a Best Rated Business in Orange for real estate law. In those same years, Jason Burris was recognized as a Super Lawyers Rising Star, a top attorney in the 2.5% of attorneys under 40 who have been in practice for 10 years or less. If you are starting a new business or have questions about operating your business from a legal standpoint, you can give Burris Law a call.