Starting a Business
When starting a business one of the most important decisions that need to be made is the legal structure of the organization. There are a variety of factors which go into this decision but the most important factor for determining a business structure is the divisions of ownership (Small Business Association, 2021). Depending upon the number of members or owners; this factor will decide the type of organizational structure.
Two common forms of ownership are the Limited Liability Corporation and the Partnership. These two forms of ownership are common and very similar in design. The difference between these organizational structures is directly related to the number of owners or members in the company. For example, a company with just two members would be a partnership. This type of ownership is designated when two parties have ownership of the organization. As the number of owners increases, then the type of business structure will need to be changed. (This is not to say that two people cannot form an LLC because they can but they must create the corporation in order to not be considered a partnership.)
Organizations with more than two members which have differing levels of ownership would be formed as a Limited Liability Corporation (LLC). This type of structure offers more protection for members and has many of the same benefits of a regular corporation. Although number of owners is most important there is another significant difference in the organization of the company between LLC and Partnership. This difference is the way in which profits are dispersed and taxed.
Partnerships split profits after expenses have been taken out from the company. This allows owners to easily take out costs. The problem with the partnership in this regard is that it offers less protection from litigation and owners share culpability. In contrast, the LLC operates as a corporation in so far as members are paid as employees or on profit sharing. According to (Cheeseman, 2010),
A limited liability company (LLC) is an unincorporated business entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations. An LLC is taxed as a partnership unless it chooses to be taxed as a corporation, the owners can manage the business, and the owners have limited liability. Many entrepreneurs who begin new businesses choose the LLC as their legal form for conducting business.
The LLC allows for more protection but does increase costs because taxes are more for corporations then for partnerships. Depending upon the type of business that is being formed and its level of risk would also be a major factor for choosing an LLC over a partnership. “LLCs are creatures of state law. “LLCs are treated as artificial persons who can sue or be sued, enter into and enforce contracts, hold title to and transfer property, and be found civilly and criminally liable for violations of law” (Cheeseman, 2010, p. 367). This is a significant difference with partnerships in which ownership and risk pass-through to the owners.
Depending upon the number of owners and the risk of a business would be the determining factors for choosing the organization’s legal structure. I believe that the investors and productions team is protected by the limited liability company codes. For example, a partnership would be good choose for a business which is low in litigation such as computer repair. As well, the partnership is also good if the skills of the owners are necessary to the business. Two owners that are skilled in computer repair can both add equally to the business and are necessary for the company to function.
An LLC would be chosen as a business entity if there was a larger risk of litigation. For example, contractors and home improvement services are at a higher risk of litigation. The choice of the LLC is prudent because the owners would not wish to lose their personal assets in the event of a lawsuit.
One might think that forming an LLC would always be more intelligent than forming a partnership and she might be right in this thinking depending upon the cost of startup. If there are considerable amounts of assets then the formation of the LLC would make sense. However, if there are no real tangible assets then a partnership would be a better choice for ownership because of its inexpensive setup. The formation of a partnership or LLC really depends upon the size, number of owners, and risk of litigation. Depending upon these factors defines the form of business organization that should be utilized.
Cheeseman, H. (2006) Business Law: Legal Environment, Online Commerce, Business Ethics, And International Law Prentice Hall
SBA. (2021). Incorporating your business.