Business Formation
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.
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Business Formation Law Articles
- What’s in a Fictitious Name?A fictitious name is a pseudonym for a business or person that is often most beneficial in marketing and advertising efforts. Fictitious names are regulated by Florida Statute 865.09 and must be registered with the Division of Corporations and published in a local newspaper. A properly filed and registered fictitious name allows the business or person that owns it to conduct business legally under that name and claims the name so it cannot be easily used by others.
- Legal Needs in Setting up a Successful Construction Company in CaliforniaAre you preparing to set up your own construction company? It is imperative that you have the right structure in place. Here are key things to know about setting up a successful construction company in California.
- Minimizing Debt Transfer When You Purchase a BusinessAre you considering buying a business in California’s Bay Area? If so, it is imperative that you ensure the transaction is properly structured. A well-structured purchase agreement is especially important if the target company has a considerable amount of debt. With the right approach, you may be able to minimize the debt that you take on as part of the transfer. Here, our California attorney for buying a business highlights some of the key things that you should know about minimizing the debt transfer when you purchase a company.
- Apply for Your California Home Health Care License Before Purchasing a Home Health Care CompanyHome health care is a rapidly expanding industry in California. The Employment Development Department (EDD) notes that the home health care industry already generates more than $10 billion in annual revenue in our state. You may be thinking about purchasing a home health care company—either to add to your existing business or to get into the industry. When buying or acquiring a home health care agency in California, it is imperative you understand the licensing requirements. You should apply for your license before you purchase the company.
- Securing Your Medi-Cal License Before You Purchase a California Medical PracticeAre you preparing to purchase or acquire a medical practice in California? It can be a fruitful business decision—but it is crucial that all aspects of the transaction are handled properly. Health care is a highly regulated industry. You need to obtain a Medi-Cal license—and there are certain steps that you should take to help ensure your application is approved in a timely manner. Our Bay Area business law attorney explains why it is so important to secure your Medi-Cal license before you purchase a medical practice in California.
- What Are the Rights of a Minority Shareholder in California?What are the best strategies to assert and protect your rights and interests as a minority stakeholder in a California business or corporation?
- Why Is an LLC Operating Agreement So Important in California?What is the purpose behind an LLC operating agreement and why is this such an important document in an LLC in San Diego and Southern California? In these days of downloading forms from a website and rushing into business most LLCs miss one of the most important issues in the process of forming a business – the operating agreement.
- What Are Corporate Bylaws and a Shareholders’ Agreement?What are the corporate bylaws and the shareholders’ agreement in an S Corporation, C Corporation, Professional Corporation or Management Service Organization or MSO? What protections do they provide? Why is it important for you to thoroughly review these documents during business formation and at regular intervals throughout the life of your corporation?
- Can My Accountant or CPA Draft My Florida Business's Legal Documents?Should you ask your accountant or CPA to draft my legal business documents. In short, no. But equally so you should not have your business lawyer prepare your taxes unless that person is also an accountant or CPA. Occasionally accountants or CPAs try to serve their clients and help them by preparing bylaws for an Inc. or an operating agreement for an LLC or contracts. But those people lack the experience and training of skilled business attorneys and their good intentions often make matters worse.
- Planning for a Transition in Your Florida BusinessBusiness transition planning is preparing for the handover by sale, but-out, or take-over following the demise of the owner. This is accomplished through corporate governance documents like an operating agreement or partnership agreement.
