Legal Structure

To begin any type of new business you must decide how you want the business structured. Businesses fit into one of three basic types.

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These are:

• Sole Proprietorship
• Partnership
• Corporation — Regular or S-corporation

The decision on how to structure a business varies for each owner. There is, of course, no need to make the business structure more complicated than necessary. If you feel the need, consult with an attorney, accountant or business counselor. The person who helps you should be familiar with your type of business, your business goals and personal finances.

Sole Proprietorship

Most businesses begin as sole proprietorships, the simplest form of business. No special legal steps are required to get started and it is easiest to end. Bookkeeping and tax preparation are also the simplest. For income tax reporting purposes, as a sole proprietor you and your business are the same. You do not pay yourself a salary as such, because your profits, if any, are your salary. You may or may not have a trade name, as you choose.

Partnership

There may be good reasons why you need to consider incorporating or forming a partnership. Partnerships are necessary when two or more persons wish to enter into business together. Partnerships have the advantage of combining the resources or skills of two or more people into the enterprise. A partner, for example, might provide a source of needed start-up capital for a business. A written partnership agreement, although not mandatory, is almost always a practical necessity. It describes each person’s responsibilities, how profits and losses will be divided, how a partner can leave the business, and what happens in case of a partner’s death, disability or serious discord. You may wish to use an attorney for this purpose.

Partnerships do not have permanence; if one partner leaves, the partnership is dissolved. Partners are personally liable for all liabilities of the partnership. But note that a new form of partnership called a limited liability company, approved by the State of Virginia in 1991, provides liability protection for partners. Partnerships must file a federal income tax return but do not pay tax; each partner’s share of profits or losses are included in the individual partner’s income tax return.

Corporation

The advantages and disadvantages of incorporating are numerous and complex. They take into account issues of duration of the business, capital formation, income distribution and retention, liability protection, ownership transfer, taxation, and legal costs. One main reason businesses incorporate is for the liability protection that a corporation provides to shareholders. The choice between a regular corporation versus an S-corporation deals largely with tax considerations.

S-corporations pass through profits or losses directly to the shareholders, much like in a partnership. In the eyes of the government, a corporation is a legal entity distinct from its owner or owners. It reports and pays taxes separately and its organization and operation are regulated by Virginia law. A corporation has permanence; unlike a partnership or a sole proprietorship, it cannot be so easily dissolved. Using an attorney to incorporate is not legally mandatory but is recommended.

Business.gov

Complying with business laws and regulations can be a burden on small businesses. Business.gov is an online resource developed by the SBA to provide legal and regulatory information to America's small businesses.

Because laws and regulations affect every aspect of business strategy, topics covered on this site range from the most basic and crucial, such as choosing a business structure or hiring a lawyer, to highly specialized issues such as e-commerce and exporting. The site also acts as a gateway to federal, state and local information that affects small businesses.