Business Law - Common Forms of Business Organization

Hey, thanks for joining me for this lecture where we're going to be talking about the different forms of business organization. Now we're going to explore some of the various types of entities that entrepreneurs and investors commonly use. It's crucial to understanding these forms so that you can make smart decisions about how to legally structure your business. We're going to be covering four main types, including sole proprietorships, partnerships, limited liability companies or LLCs, as well as corporations.

We're also going to compare and contrast them in several key areas, including legal position, creation, control, lifetime, taxation, as well as transferability of ownership and dissolution. So with all of that being said, let's go ahead and get started. All right, first we're going to start with the simplest form of business organization, and that is a sole proprietorship. Sole proprietorships are great because it's kind of like having your own little gig.

You're the boss, you can call all the shots. Plus creating a sole proprietorship is very simple. There is not a lot of paperwork that's needed, but there is a catch. With a sole proprietorship, there is no legal separation between you and your business.

So if things go south, your personal assets are at risk. It's also a one person show, which in some cases is actually a good thing, but it ends when you decide to close up shop or if the owner unfortunately passes away. Now from a tax standpoint, owners and a sole proprietorship report everything on their personal tax returns via a schedule A form. Selling and transferring the business can be a little bit tricky, but from a dissolution standpoint, when it's time to call it quits and cease operations, it's very simple to do.

Now let's talk about partnerships. Now there are two main types of partnerships. There are what we call general partnerships as well as limited partnerships. In a general partnership, you and your partner or partners have an equal say in the running of the business.

But one of the unfortunate things is that you're personally liable for any debts or obligations of the partnership. We refer to this as joint and severally liable or joint and several liability. Now with limited partnerships, they're a little bit different. In a limited partnership, we create two classifications of partners.

There are still general partners who have the control and liability of the business, but they also introduce a second partner classification called limited partners who are more like silent partners with limited liability. Now what this means is that they are only liable for what they've invested in and typically cannot be pursued personally for any of the actions related to the business. Now creating a partnership is typically straightforward. It usually involves a simple agreement between you and your partners.

The partnership can last for as long as you and your partner or partners agree or until someone decides to leave. From a tax standpoint, it's handled very similarly to a sole proprietorship with each partner reporting their share of profits or losses on their own personal tax returns. Transferring ownership interest can be a little bit tricky though unless you've got it all spelled out in your partnership agreement, which is actually pretty uncommon. And dissolving the partnership can happen when somebody leaves or when everyone agrees that it's time to part ways.

All right, we're going to shift gears now and we're going to dive into limited liability companies or LLCs. Now LLCs are a hybrid of partnerships and corporations, which we're going to discuss momentarily. They offer some of the best of both worlds. The great thing about an LLC is it shields your personal assets from your business liabilities.

So if things don't go well, your house, your car, your other personal possessions are safe and protected under the LLC. Now to create an LLC, you have to file some paperwork with the state and adopt what's known as an operating agreement. You have a little bit more flexibility in terms of control and management structure. Lifetime of an LLC can also be forever or for a specified period of time depending upon what you decide.

And there are several different taxation options as well. You can choose to have the profits and losses flow through to your personal tax return or you can elect to be taxed as a corporation if it's financially advantageous for you to do so. Transferring ownership interests can be a little bit tricky. So make sure you have it all spelled out in your operating agreement.

And when it's time to dissolve the LLC, make sure you follow the procedures outlined in your operating agreement or take a vote among the members. Now last but not certainly least, we have corporations. Corporations are certainly the most common, especially for larger businesses. A corporation establishes a separate legal entity apart from the owners, which creates limited liability protection, which everyone enjoys.

Now your personal assets are safe, even if things don't go well with the business. Creating a corporation though involves quite a bit of paperwork, including filing an articles of incorporation with the state. You have to adopt a document called bylaws and the control of a corporation is typically structured through shareholders, directors, as well as corporate officers. Corporations have existence in perpetuity, which means they can last forever, which is great from a sense of permanence.

But from a tax standpoint, corporations can be a little bit tricky by default. Corporations suffer from what's called double taxation, which means that the profits are tax at the corporate level. And then again, when distributed to the shareholders, as what's known as a dividend. But with that being said, there are ways that you can get around this.

For example, you could elect for your corporation to be treated as an S corporation, and then you can enjoy pass-through taxation similar to an LLC. Transferring ownership interest in a corporation is actually really, really simple through the buying and selling of shares of stock. And when it's time to dissolve the corporation, you'd have to file necessary paperwork with your state. So I hope that gives you a good understanding of some of the common forms of ownership, some of their differences, disadvantages, as well as their advantages.

Each one of them has pros and cons when it comes to legal position, creation, control, taxation, transferability, as well as dissolution. So it's important to remember to select the form of organization that fits the specific needs and goals of your business. I always recommend consulting with both legal and financial professionals before making the decision because they can have some long-lasting implications. But hopefully that's enough to get you started so that you can ask the right questions.

Alright, thanks for watching this video on some of the common forms of business organization. I hope you enjoyed it and found the information to be useful. Thanks again for watching, and we'll see you next time.