the small business resource center
Legal Structure
Once you decide to start a business, you must decide what type of business entity to set up. There are many legal and tax considerations that become complicated, and it is advised that you consult an attorney or accountant to help you determine the appropriate structure. There are five principle forms of business structures listed below. Get more complete details in the Entrepreneur's Tool Kit. Structure | Advantages | Disadvantages | Sole Proprietorship A business owned and operated by one person. | • Ease of formation • Sole ownership of profits • One owner has control • Flexibility in management • Relative freedom from government intervention | • Unlimited liability. This extends to all of the
proprietor’s assets including the home and car. • Unstable business life. The business may terminate upon the death of the owner • Less available capital • Difficulty in obtaining long-term financing • Relatively limited viewpoint and experience | PartnershipAn association of two or more persons to carry on as co-owners of a business for profit. Click on SCORE for more details. | • Ease of formation • Direct rewards • Growth and performance facilitated • Flexibility in decision-making • Relative freedom from government control and
special taxation | • Unlimited liability of at least one partner • Unstable life – elimination of either partner
constitutes automatic dissolution of partnership • Difficulty in obtaining large sums of capital • Firm bound by acts of one partner as agent • Difficulty of disposing of partnership interest
| Limited Liability Companies and Partnerships (LLC, LLP)Distributes income and income tax to the partners and protects them from personal liability for the business’ debts. It provides limited liability for the owners. Click on The Alabama Secretary of State’s Office for more details. | • Limited liability without limits on management
participation • Flexible ownership and capital structure • No double taxation • Allocation of tax benefits among members | • Initial cost to establish • Poor tax treatment of fringe benefits • Rules are still evolving | CorporationThe most complex business structure and a distinct legal entity. It is formed by the authority of a state government. A corporation is comprised of shareholders, directors, and officers. | • Limitations of the stockholders’ liability to a fixed investment amount • Ownership is readily transferable • Separate legal existence • Stability and relative permanence of existence • Relative ease of securing capital • Delegated authority • Ability to draw on expertise of many | • Activities are limited by charter and various laws • Minority stockholders may be exploited • Extensive government regulations and reports • Fewer financial incentives for the manager • Double taxation – income tax on corporate net income and on salaries and dividends | Subchapter S CorporationA legal corporation afforded special tax treatment under Subchapter S of the Internal Revenue Code, they retain features of corporations,but for federal tax purposes they are treated much like sole proprietorships and partnerships. Information and forms can be obtained from the Secretary of State’s Office. | • Limited stockholder liability • Ownership is readily transferable • Separate legal existence • Taxed similar to partnership. Profits pass through corporation un-taxed, but are taxed as individual stockholder income, loss, deductions and credits | • Activities limited by charter and various laws • Extensive government regulations and reports • Limits to the number of stockholders • S Corporation cannot own more than 80% of any other corporation • Stockholders must be individuals, not entities • Stockholders must be resident citizens • Only one class of stock may be issued • The law prohibits S incorporation for the sole purpose of obtaining limited liability status |
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