Business Formation Law
Business Formation Law in the United States is regulated by State authorities. Nevertheless, most state business laws are very similar. Additionally, a few federal laws affect business formation considerations, as well, such as federal tax laws, employment laws, etc. Types of Businesses Entities
Sole Proprietorship. A form of business in which one person owns all the assets of the business in his or her own name. A person who does business for himself or herself and who does business without formally creating a separate business organization is engaged in the operation of a sole proprietorship. Many small businesses operate as sole proprietorships, including professionals, consultants, and other service businesses. Often, these are businesses that require minimal amounts of capital.
A sole proprietorship is not a separate legal entity, like a partnership or a corporation, and thus, no legal formalities are necessary to create this form of business, other than appropriate licensing to conduct business and registration of a business name if it differs from that of the sole proprietor. Because a sole proprietorship is not a separate legal entity the sole proprietor must report income and expenses from the business on Schedule C of her or his own personal federal income tax return.
A major concern for persons organizing a business enterprise is limiting the extent to which their personal assets, unrelated to the business itself, are subject to claims of business creditors. A sole proprietorship gives the least protection because the personal liability of the sole proprietor is generally unlimited. Both the business assets and the personal assets of the business owner are subject to claims of the business's creditors. In addition, existing liabilities of the sole proprietor will not be extinguished upon the dissolution or sale of the sole proprietorship.
General Partnerships are a joint business in which responsibility for management, profits, and, most importantly, the liability for debts is shared by the general partners. Anyone entering into a general partnership must remember that each general partner is liable for all the debts of the partnership. Furthermore, any partner alone can bind the partnership on contracts. In essence, a general partnership is a collaboration between two or more sole proprietors.
Limited Partnerships are a special type of partnership which are very common when people need funding for a business, or when they are putting together an investment in a real estate development. A limited partnership requires a written agreement between the business management, who are general partners, and all of the limited partners. Each limited partner makes an investment of funds into the partnership and is supposed to receive a predetermined share of the profit, which is ordinarily greater than that of each of the general partners. The maximum number of limited partners is set by state law to prevent using interests in the limited partnership as if they were shares of stock in a corporation. In addition to priority in profit, tax deductions, and potential share in the success of the enterprise, the limited partner is "limited" in potential loss, since all he or she can lose is his or her investment, and the general partners alone are subject to claims, debts in bankruptcy, and lawsuits against the partnership. Limited partnerships must file their name and names and addresses of general partners with the Secretary of State or other designated officer in the state in which the partnership is created so the public can find out who the responsible parties are.
Corporations are an organization formed with state governmental approval to act as an artificial person to carry on business, which can sue or be sued, and can issue shares of stock to raise funds with which to start a business or increase its capital. Corporations become separate legal entities from their owners, so liability for debts or damages caused by the corporation are limited to the company's assets. There are two primary types of corporations: S Corporations and C Corporations. The biggest differences between the different types of corporations have to do with how stocks are held and how taxes are assessed.
Limited Liability Company (LLC) is a non-corporate business whose owners actively participate in the organization's management and are protected against personal liability for the organization's debts and obligations. The LLC is a hybrid legal entity that has both the characteristics of a corporation and of a partnership. An LLC provides its owners with corporate-like protection against personal liability. It is, however, usually treated as a non-corporate business organization for tax purposes.
Business formations can be simple or difficult depending on many factors. You can learn more about the process of forming a business using the resources below. You can also find an attorney in your area able to help you with setting up your business on the Law Firms page of our site.
Know Your Rights!
Business Licenses and Permits by State
Business Formation Law - US
- ABA - Business Law Section
The Mission of the Section is to serve the public, the profession and the Section by furthering the development and improvement of business law, educating Section members in business law and related professional responsibilities, and helping Section members to serve their clients competently, efficiently and professionally.
Business.gov helps small businesses understand their legal requirements and locate government services from federal, state and local agencies. Business.gov is an official site of the U.S. Small Business Administration.
- EPA for Businesses and Non-Profits - Environmental Compliance
Compliance assistance means helping businesses, federal facilities, local governments and tribes meet their environmental regulatory requirements. Compliance assistance providers help regulated communities and businesses comply with environmental laws through one-to-one counseling, online resource centers, fact sheets, guides and training.
- Office of Advocacy - Small Business Advocacy
In 1976, the U.S. Congress created the Office of Advocacy within the U.S Small Business Administration to protect, strengthen and effectively represent the nation's small businesses within the federal government's legislative and rule-making processes. The Office of Advocacy works to reduce the burdens that federal policies impose on small firms and maximize the benefits small businesses receive from the government. Advocacy's mission, simply stated, is to encourage policies that support the development and growth of American small business.
- Starting a Business - Policies
The process of starting a business involves complying with a number of laws and regulations - from writing a business plan to setting up a location. Here you will find guidance to help you successfully and legally start and run your business.
Publications Related to Business Formation Law
- How to Start and Grow an Online Business
Starting a business is one of the most exciting journeys an individual can take. Over ten million people each year consider starting a business. As a result, more than three million new small businesses are started annually.
- SBA Newsletters
The FREE SBA newsletters listed below offer a wide variety of information and business opportunities for small businesses. Subscribe to one or many and receive e-mail notification as soon as items are published.
- Small Business Resource Magazine
Published every year, Small Business Resource magazine is the most complete source of information on starting and expanding your business Every guide is published with information and resource listings specific to where you live.
Organizations Related to Business Formation Law
- Office of Women’s Business Ownership (OWBO)
The Office of Women’s Business Ownership (OWBO) exists to establish and oversee a network of Women’s Business Centers (WBCs) throughout the United States and its territories. Through the management and technical assistance provided by the WBCs, entrepreneurs, especially women who are economically or socially disadvantaged, are offered comprehensive training and counseling on a vast array of topics in many languages to help them start and grow their own businesses.
We are America's premier source of free and confidential small business advice for entrepreneurs. We offer advice online and in-person at one of our 364 offices nationwide. very year, SCORE helps almost 20,000 businesses start. The next success story could be yours.
- Small Business Development Centers (SBDC)
The Office of Small Business Development Centers (SBDC) provides management assistance to current and prospective small business owners. SBDCs offer one-stop assistance to individuals and small businesses by providing a wide variety of information and guidance in central and easily accessible branch locations.
- US Small Business Administration (SBA)
The U.S. Small Business Administration (SBA) was created in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation. We recognize that small business is critical to our economic recovery and strength, to building America's future, and to helping the United States compete in today's global marketplace.
Articles on HG.org Related to Business Formation Law
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- Buy-in and Buy-out of Accountants to an Accounting GroupAccountants come and go from larger accounting groups. When an accountant enters a practice as a shareholder or partner, the practice should prepare for the accountant's exit. The exit is inevitable. In this article, I give one simple rule for structuring the accountant’s buy-in to a practice and the later buy-out of the accountant's shares from the practice.
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- Understanding the Differences Between Corporations, LLC's, and PartnershipsCongratulations on your decision to start a new business. The question you may be asking, though, is what kind of business you should form? What is the difference between a corporation, an LLC, and a partnership? Why form one and not another?
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