13.1 Business Structures: Overview of Legal and Tax Considerations

Choosing the right business structure is crucial for entrepreneurs. It impacts everything from liability protection to tax treatment and growth potential. Factors like business purpose, ownership preferences, and scalability plans all play a role in this decision.

Different structures offer unique advantages. Sole proprietorships are simple to set up, while LLCs and corporations provide more flexibility for growth. Nonprofits focus on social causes, reinvesting profits into their mission. Understanding these options helps entrepreneurs make informed choices.

Selecting and Structuring a Business

Purpose and structure selection

Top images from around the web for Purpose and structure selection

• 

  One Community's Open Source Highest Good Non-profit Economics Portal View original

  Is this image relevant?

• 

  Operating Models: How Nonprofits Get from Strategy to Results | Bridgespan View original

  Is this image relevant?

• 

  One Community's Open Source Highest Good Non-profit Economics Portal View original

  Is this image relevant?

• 

  One Community's Open Source Highest Good Non-profit Economics Portal View original

  Is this image relevant?

• 

  Operating Models: How Nonprofits Get from Strategy to Results | Bridgespan View original

  Is this image relevant?

1 of 3

Top images from around the web for Purpose and structure selection

• 

  One Community's Open Source Highest Good Non-profit Economics Portal View original

  Is this image relevant?

• 

  Operating Models: How Nonprofits Get from Strategy to Results | Bridgespan View original

  Is this image relevant?

• 

  One Community's Open Source Highest Good Non-profit Economics Portal View original

  Is this image relevant?

• 

  One Community's Open Source Highest Good Non-profit Economics Portal View original

  Is this image relevant?

• 

  Operating Models: How Nonprofits Get from Strategy to Results | Bridgespan View original

  Is this image relevant?

1 of 3

• Business purpose and goals significantly impact the choice of business structure
  • Key factors to consider include liability protection, tax treatment, ownership, management, and funding options
• For-profit businesses primarily aim to generate income and profits for their owners
  • Most common structures for for-profit businesses are sole proprietorships, partnerships, LLCs, and corporations
• Nonprofit organizations focus on advancing charitable, educational, or social causes
  • Required to reinvest any profits back into the organization's mission and activities
  • Typically structured as nonprofit corporations (501(c)(3) organizations) or trusts
• Scalability and growth plans play a crucial role in structure selection
  • Sole proprietorships and partnerships are easier to establish but offer limited potential for growth
  • LLCs and corporations provide greater flexibility for growth and attracting investment

Features of major business structures

• Sole proprietorships
  • Owned and operated by a single individual, with no legal distinction between the owner and the business
  • Simple to establish and manage, with minimal paperwork and regulatory requirements
  • Owner has unlimited personal liability for all business debts and legal obligations
• Partnerships
  • Owned by two or more individuals who share management responsibilities and profits
  • General partnerships: all partners have equal management rights and unlimited personal liability
  • Limited partnerships: general partners manage the business and have unlimited liability, while limited partners have limited liability and no management control
• Limited Liability Companies (LLCs)
  • Hybrid structure combining key features of partnerships and corporations
  • Owners (called members) have limited personal liability for business debts and obligations
  • Offers flexible management structure and tax treatment options (can be taxed as partnership or corporation)
• Corporations
  • Separate legal entities owned by shareholders, who have limited personal liability for business debts and obligations
  • C corporations: taxed as separate entities, potentially leading to double taxation (corporate income tax and personal income tax on dividends)
  • S corporations: pass-through tax treatment, avoiding double taxation (profits/losses passed through to shareholders' personal tax returns)

For-profit vs nonprofit organizations

• For-profit organizations
  • Operate with the primary goal of generating profits for their owners or shareholders
  • Profits can be distributed to owners as income or reinvested back into the business for growth
  • Typically structured as sole proprietorships, partnerships, LLCs, or corporations (C or S)
• Nonprofit organizations
  • Operate to fulfill a charitable, educational, religious, or social mission that benefits the public
  • Must reinvest any profits into the organization's mission and activities, rather than distributing to owners
  • Typically structured as nonprofit corporations or trusts
  • May qualify for tax-exempt status under Internal Revenue Code Section 501(c)(3) if certain requirements are met
  • Must follow strict regulations on fundraising, financial reporting, and governance to maintain tax-exempt status
• Structural implications
  • For-profit structures offer greater flexibility in ownership, management, and profit distribution
  • Nonprofit structures require adherence to specific regulations and guidelines to maintain tax-exempt status
  • Nonprofit organizations may be eligible for grants, donations, and tax-exempt status that are not available to for-profit entities

Legal and Tax Considerations

• Legal entity: The type of business structure chosen determines the company's legal status and obligations
• Business ownership: Different structures offer varying levels of control and responsibility for owners
• Management structure: The organization of leadership and decision-making processes within the business
• Tax classification: How the business is categorized for tax purposes, affecting reporting and payment obligations
• Limited liability: Protection of personal assets from business debts and legal claims (offered by certain structures)
• Business registration: The process of officially establishing the business with relevant government authorities