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Forms of Business
by Andrew H. Sargent, MBA, JD

Overview

You have a number of options when it comes to the legal form of a business. These are (i) sole proprietorship; (ii) partnership; (iii) limited liability company; (iv) corporation. Each alternative has its advantages and disadvantages. The scope of this paper is extremely limited. Your final choice should be made only after discussing the matter with your attorney.

Advantages & Disadvantages Sole Proprietorship
Advantages - ease of forming, low cost, limited paperwork, ease of raising limited amounts of capital.
Disadvantages - unlimited liability, limited life, hard to raise large amounts of money. Hard to get expertise in company.

Partnership
Advantages - ease of forming, low cost, limited paperwork, more talent then Sole Proprietorship, can raise more money then SP.
Disadvantages - unlimited liability, liable for acts of partners, limited life, hard to raise large amounts of money. Hard to get expertise in company.

Limited liability company
Advantages - limited liability, ease of raising larger amounts of money
Disadvantages - cost of forming, may not be available in all states, more paperwork.

Corporation
Advantages - limited liability, unlimited life, ease of raising large amounts of money. Ease of getting expertise. Stock are options popular with employees.
Disadvantages - cost of forming, state reports, double taxation, more paperwork.

Discussion by Form Sole Proprietorship
This is the simplest form of business. In actuality you do not have to do anything. If you start a business this is where you will begin. You may need to obtain a business license depending upon your local city laws. You may need to file a factious name statement if you are using a name other then your own name. This is know as a "dba" (doing business as).

Since the business is actually you - you are totally liable for everything you (or the business) does. Creditors have full access to all your assets and are not limited to just the assets you "put into the business." This is why it is easy to obtain limited credit and small loans. If you make a bad business decision and lose money you could lose your home since creditors have access to all your assets. Since the business is actually you the business ends when you die. Your heirs may be able to sell the business but the buyer will have to create a new legal form themselves.

Getting top quality people and talent may be difficult. Employees do not share in the increase in the value of the business. You own 100% of the business and cannot give a share to employees. If you do then you are no longer a Sole Proprietorship and have become a partnership.

Partnerships
Definition - two or more people engaged in a venture for a profit. Note - there is no requirement for any written agreement. The courts look at the actions you have taken to decide if your business is a partnership. Major disadvantage is unlimited liability of each partner for almost all acts of every other partner. Unless you have a written partnership agreement it is assumed each partner owns an equal share. Dissolving a partnership can be as difficult and destructive as a divorce so plan for this when your form one. A written partnership is recommend in all cases.

Limited liability company
A new hybrid form which is available in some states (i.e. Washington) This is easier to form than a corporation and provides limited liability for the investors/owners. It can function like a corporation or a partnership. The choice is made when you form it. Cost estimates to form appear to be very close to that of a corporation. May be taxed like a corporation or partnership. You will need to discuss this form with your attorney.

Corporation
The corporation is a legal entity in its own right. It acts through its officers. The owners (shareholders) elect a board of directors who then hire the management which runs the business. It is easier to raise large amounts of capital because you can sell off a percentage. Stock options are extremely popular with employees. This is the most complex form to create and involves annual filings and reports. The limited liability also make it one of the most popular forms. If you mix your personal assets and the corporation assets you may destroy the limited liability so do not commingle assets.

Your lawyer or accountant can assist you in setting up the proper systems.