Legal Form of Organization in Business Plan
The legal form of organization in business plan is used to decide how the company will function, how roles will be assigned and how relationships will work.3 min read
The legal form of organization in business plan is used to decide how the organization will function, how roles will be arranged and assigned, and how relationships will work. These organizational steps should take place at the beginning of the business formation.
Starting a Business
The first step when beginning a business is to name the business. The name must be unique and not in use by another existing entity. The next step is to decide on the organization type your business will use. Each business entity has specific requirements on how they are run including how income is reported. The business types include:
- Sole proprietorship.
- Limited Liability Company.
- Limited Liability Partnership.
- S Corporation.
- Tax-exempt organization.
Each type has advantages and disadvantages that should be reviewed before making a final decision. However, the business type you choose isn't permanent. As the needs of your business change, the business entity type can be changed. Examples include:
- Changing a sole proprietorship to a partnership due to growth.
- Switching to a corporation to establish protection that comes with limited liability.
Limited Liability is attractive to business owners because it protects personal assets from any debts or obligations incurred by the corporation.
Business Type Requirements
A major component of selecting a business type is what is required to be legal and the tax implications.
- Sole proprietorships are owned by one person or a marriage. Their requirements include:
- Applications to the state government are not required.
- Dependent on the state, registering the business may be required with the state and/or country.
- A business license may be required based on the type of business and state requirements.
- The IRS views all business activity as personal. When filing, personal and business income are seen as the same thing.
- A sole proprietorship is personally responsible for all aspects of the business. If the business is sold, it can impact any personal assets if you are found liable.
- Partnerships can be a limited or general partnership. Their requirements include:
- In a general partnership, two or more sole proprietors are seen by the IRS as having equal responsibility.
- Any profit and loss distribution is determined by the partnership agreement and is then passed to the individual partners.
- Profit and loss distribution does not have to match the percentage of ownership.
- The partnership is not subject to income or franchise tax.
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