Starting a Business: The Business Entity

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The Business Entity

One of the first decisions a new business owner faces is choosing a structure for the business. There are a number of legal structures or legal forms under which a business can operate. Businesses range in size and complexity, from a self-employed plumber to a large corporation, and can be organized in a variety of ways. This decision will depend in the number of people who will control the company, how decisions are to be made, and other considerations such as liability and tax issues.

You may operate your business or organization under any one of several organizational structures. Each type of structure has certain advantages and disadvantages that should be considered. You should contact an attorney, accountant, financial advisor, banker, or other business or legal advisor to determine which form is most suitable for your business or organization.

The principal types of business organizations are Sole Proprietorships, Partnerships and Corporations. In making a choice, you will want to take into account the following:

*Your vision regarding the size and nature of your business.
*The level of control you wish to have.
*The level of structure you are willing to deal with.
*The business' vulnerability to lawsuits.
*Tax implications of the different ownership structures.
*Expected profit (or loss) of the business.
*Whether or not you need to reinvest earnings into the business.
*Your need for access to cash out of the business for yourself.

Sole Proprietorships

The Sole Proprietorship is the most common form of business structure. The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business. For more information on Sole Proprietorships, please continue here

General Partnerships

In a General Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. A General Partnership is composed of two or more persons who agree to contribute money, labor, an/or skill to a business. Each partner shares the profits, losses, and management of the business, and each partner is personally and equally liable for debts of the partnership.Formal terms of the partnership are usually contained in a written partnership agreement.This is a legal document that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed. Yes, it's hard to think about a breakup when the business is just getting started, but many partnerships split up at crisis times, and unless there is a defined process, there will be even greater problems. They also must decide up-front how much time and capital each will contribute, etc. For more information on General Partnerships, please continue here

Limited Partnerships

A Limited partnership is composed of one or more general partners and one or more limited partners. The general partners manage the business and share full in its profits and losses. Limited partners share in the profits of the business, but their losses are limited to the extent of their investment. Limited partners are usually not involved in the day-to-day operations of the business. For more information on Limited Partnerships, please continue here

Corporation

A Corporation chartered by the province or territory in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A Corporation can be taxed, it can be sued, and it can enter into contractual agreements. A Corporation is comprised of three groups of people: shareholders, directors and officers. The owners of a Corporation are its shareholders. The shareholders elect a board of directors that has responsibility for management and control of the Corporation and to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. For more information on Corporations, please continue here