Business organization law governs the creation, management, and dissolution of businesses. Law firms that specialize in this aspect of law assist with startups, bankruptcy, and legal requirements throughout the lifecycle of the organization. They are an invaluable resource for people seeking to start their own businesses.
Choosing the Right Business Structure
One of the most important decisions you will make in setting up your business is how to structure it. There are several business structures from which you can choose. Each structure comes with a different set of rules, as well as varying benefits and drawbacks.
The business structure will have an enormous impact on your liability, the amount of income tax that you will pay, and your ability to raise finance.
It is, therefore, vital to consult with your attorneys before settling on the legal entity that suits your business needs.
Different Business Entities
Below, we’ll discuss some of the most common business structures along with their advantages and disadvantages.
The simplest form of a business entity is a sole proprietorship. As a sole proprietor, you make all business decisions. All the income accrues to you. You are also responsible for all losses.
Setting up a sole proprietorship requires very little by way of administration. All you need to do is follow the registration and licensing requirements of your state.
Although the most common business structure, the sole proprietorship has a significant disadvantage. You can lose all your assets if someone takes legal action against your business. There is, of course, the option of business insurance to cover this liability.
Also reasonably straightforward, a partnership allows professionals to form a business together. A general partnership protects them from unlimited liability even though it is an unincorporated business. (Unincorporated means one or more persons privately own the business). There are two types of partnerships: Limited liability partnerships and limited partnerships. Your rights and obligations will depend on what kind of partnership you choose.
If you are a limited liability partnership, you will find your liability is capped at the amount that you have invested in the business.
In a limited partnership, one partner has unlimited liability, and the liability of the others is limited. The partner with unlimited liability is typically the senior partner who has more control over the business decisions than the others.
A corporation is a legal entity with its own rights and obligations, assets, and liabilities. The process of setting up a corporation is complicated and expensive. It is, however, a sure way of protecting the owners from unnecessary liability should anyone choose to sue the organization.
Corporations are either public or closely held. The ownership of closely held companies is typically vested in just a few owners, while public companies sell shares to the general public. Corporations can raise funds fairly quickly by selling shares.
Corporations are highly structured organizations, requiring statutory meetings and careful record keeping.
Unless your company is an S Corporation, you’ll pay a lot more tax. An S Corporation is a limited liability company with annual tax filing. Corporations are highly taxed, as shareholders pay tax on dividends from the business and its corporate profits earned.
If you register your business as an S Corporation, you may apply pass-through taxation, thus, reducing the amount of tax that you pay on your earnings. With an S Corp, you may sell shares to raise funds, but the number of owners is limited to 100.
Limited Liability Company
A Limited Liability Company combines the best of sole proprietorship and incorporation in a separate legal entity. If yours is a Limited Liability Company, you, as the owner, enjoy similar protection from liability as you would if your business was a corporation.
The Internal Revenue Service will allow you to take advantage of pass-through tax as you would in a partnership or sole proprietorship. You are, however, still liable for self-employment tax payments to Social Security and Medicaid.
The only liability you have in this form of business entity is the amount that you have invested in the company. Your assets are protected.
LLC’s do have some disadvantages, as listed below:
- The creation of the business entity is a lot more complicated than a partnership agreement or sole proprietorship.
- Some states require the dissolution of LLC’s when new members join.
- The organization will dissolve when the owners die.
- An LLC can never go public, which means you cannot sell shares.
Which is Better, an LLP or an LLC?
Unless you plan to start up a small professional partnership in accounting, law, or architecture, an LLC is almost always the best choice for businesses. The reason is that an LLC is more flexible when it comes to income tax options. LLC’s can choose how they are taxed, whereas LLP’s must use pass-through tax.
Related Articles: Marketing Partners
Starting a business is fraught with various legal, statutory, and financial requirements. You must understand these before you set up your business or you could fall foul of the law.
Raising Private Equity
As a business owner, you may be interested in obtaining private equity. Private equity is money that organizations and individuals choose to invest in private companies in return for equity in the business. Remember, the more equity you sell in your business, the less control you’ll have.
Investors who are willing to take on the high risk of startup investments may offer you the venture capital you need to grow your business. You may even decide to enter a joint venture to raise money.
What are the Responsibilities of the Managing Partner?
Many accounting and legal firms have Managing Partners. The position is similar to that of a CEO in a corporation. The managing partner is responsible for policies and procedures and strategic planning in the partnership. Day-to-day operations, including accounting and personnel planning, also form an essential part of the job.
What Are the Consequences of Piercing the Corporate Veil?
Many people incorporate their businesses as a means of limiting personal liability. There are, however, certain circumstances where the courts may put aside the veil of limited liability. If this happens, the shareholders and board of directors are personally liable for the business transactions and debts of the corporation.
The law respects the protection offered by limited liability. The courts will, therefore, only consider piercing the corporate veil in circumstances where severe corporate misconduct or fraud in setting up the corporation is apparent.
How Will the Occupational Health and Safety Act Affect Your Business?
The U.S. Department of Labor is responsible for enforcing the Occupational Health and Safety Act. All employers have a legal responsibility to ensure that their employees are protected from harm while in the workplace.
Before you employ anyone, you should understand the risks inherent in your business and take action to mediate those risks. Penalties for contravening the act are high, and it could damage the reputation of the firm.
The Benefits of Seeking Advice Before Launching Your Business
Business organizational lawyers build up long-standing client-attorney relationships with their clients. Clients often require ongoing legal assistance for their business transactions as the organization grows and will likely keep returning for advice.
There are many benefits to working with the same legal advisor over time; he or she will get to know the unique characteristics of your business.
Organizational lawyers work alone or for large teams. They can specialize in business organizations’ law or combine it with other branches of the law. Lawyers working in large teams may even specialize further, becoming experts in legal aspects such as corporate governance, partnership agreements, or mergers and acquisitions.
A qualified business attorney can help you to make the right choices when it comes to business formation. In selecting the correct business structure, you can ensure financial structures that protect your assets, lower taxes, and provide access to funds. A good lawyer will ensure that you complete and submit all the required paperwork and registrations. He will also explain the complexities and costs of setting up each business entity.
Before you start your business, you should understand the legal aspects and your fiduciary duties (your obligations to disclosure and honest business practice) as they relate to the business organizational stakeholders. There are many areas, including employment, securities laws, corporate governance, and the use of intellectual property, any of which could trip you up unless you know the risks involved.
What risks does your business face?