The process of establishing a business entity may seem intimidating, but satisfying the basic legal requirements is not too difficult to accomplish. As with any other matter that pertains to the law, the process of starting a business leaves itself open to interpretation and consideration. The legal implications of starting a business often involve making decisions regarding risk, liability, ownership and taxation.
Starting a business may involve an individual or a group of people who wish to transact in goods or services. The first consideration to make is that a business is, in fact, a legal entity subject to various bodies of law. Businesses fall into two major categories – profit-based or non-profit. The profit designation will largely affect the way the organization is established, the paperwork filing requirements and the way the Internal Revenue Service looks at the business.
With regard to the way the business is structured, those interested in starting a business should be clear about their goals. The level of commercial liability and taxation that should apply to a business will be determined by the structure. The most common types of business organizations are generally sole proprietorships, corporations, limited liability companies or partnerships.
- Sole Proprietorship: This is a simple business structure that features one individual as the owner and principal. Self-employed professionals who are willing to take on full responsibility for debts and liabilities of the business will find sole proprietorships easy to create and manage.
- Corporation: This legal entity allows shareholders to enjoy ownership in the business, and limits their personal liability. The burden of debt falls on the legal entity rather than the owners. Management of a corporation is the responsibility of a board of directors appointed by the shareholders.
- Limited Liability Company (LLC): This business structure is comprised of members who are not personally liable for debts or losses. LLCs are popular in the U.S. due to the treatment they receive from the IRS in terms of income taxation.
- Partnership: General partnerships are made up of business partners in charge of management, debt and liabilities. Limited partnerships feature some partners who fulfill the role of investors while other partners act as owners and managers.
Deciding on the type of organization to form and register is a very important aspect of starting a business. For example, self-employed professionals who decide on a sole proprietorship due to the general ease of filing requirements sometimes end up paying considerable taxes or dealing with a significant liability issue. To avoid such situations, those planning on starting a business should consult with an attorney or an accountant prior to beginning their ventures.
Rules for Doing Business
Each state has jurisdiction over the business entities operating therein. The procedures for starting a business, choosing the structure and registering the organization are found in the statutes and administrative rules of the Secretary of State. Taxation of the different structures is determined by the IRS.
Some states offer certain advantages with regard to business registration. Delaware, for example, counts more than 250 major companies listed in the Fortune 500 as domestic corporations and limited liability companies. Delaware offers a corporate-friendly environment and a special Court of Chancery dedicated to hearing corporate matters. The advantages include asset protection, and privacy and tax savings, though some of these business aspects can also be found in other states.